##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-K þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934   o
  For the transition period from  to Commission File Number 1-5823 CNA FINANCIAL CORPORATION  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    36-6169860
(I.R.S. Employer
Identification No.)
 CNA Center
Chicago, Illinois
(Address of principal executive offices)
    
    60685
(Zip Code)
 (312) 822-5000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Name of each exchange onTitle of each class
    
    which registeredCommon Stock
with a par value
of $2.50 per share
    
    New York Stock Exchange
Chicago Stock Exchange
Pacific Exchange
 Securities registered pursuant to Section 12(g) of the Act:
None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
ü          No... Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK
is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10K
or any amendment to this Form 10K. [ü ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes
ü          No... As of February 21, 2005, 255,953,958 shares of common stock were outstanding. The aggregate market
value of the common stock of CNA Financial Corporation held by nonaffiliates of the registrant as
of June 30, 2004 was approximately $545 million based on the closing price of $24.59
per share of the common stock on the New York Stock Exchange on June 30, 2004. DOCUMENTS INCORPORATED
BY REFERENCE: Portions of the CNA Financial Corporation Proxy Statement prepared for the 2005 annual
meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of
this Report.




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Item
    
    
    
    PageNumber
    
    
    
    NumberPART I1.
    
    
    Business
    
    
    32.
    
    
    Properties
    
    
    113.
    
    
    Legal Proceedings
    
    
    114.
    
    
    Submission of Matters to a Vote of Security Holders
    
    
    11PART II5.
    
    
    Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    126.
    
    
    Selected Financial Data
    
    
    147.
    
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    157A.
    
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    888.
    
    
    Financial Statements and Supplementary Data
    
    
    949.
    
    

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    1759A.
    
    
    Controls and Procedures
    
    
    1759B.
    
    
    Other Information
    
    
    175PART III10.
    
    
    Directors and Executive Officers of the Registrant
    
    
    17611.
    
    
    Executive Compensation
    
    
    17612.
    
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    17713.
    
    
    Certain Relationships and Related Transactions
    
    
    17714.
    
    
    Principal Accounting Fees and Services
    
    
    177PART IV15.
    
    
    Exhibits and Financial Statement Schedules
    
    
    178By-LawsEmployment Agreement with Michael FuscoSupplemental Executive Savings and Capital Accumulation PlanFirst Amendment to Supplemental Executive Savings and Capital Accumulation PlanSecond Amendment to Supplemental Executive Savings and Capital PlanBoard of Directors Term SheetPrimary Subsidiaries of CNAFIndependent Auditors' Consent302 Certification302 Certification906 Certification906 Certification




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##### Table of Contents



PART I 
 ITEM 1. BUSINESS CNA Financial Corporation (CNAF) was incorporated in 1967 and is an insurance holding company.
Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. CNAs property and
casualty insurance operations are conducted by Continental Casualty Company (CCC), incorporated in
1897, and its affiliates, and The Continental Insurance Company (CIC), organized in 1853, and its
affiliates. CIC became an affiliate of the Company in 1995 as a result of the acquisition of The
Continental Corporation (Continental). Life and group insurance operations, which were either sold
or are being managed as a run-off operation, are conducted within CCC and Continental Assurance
Company (CAC). Loews Corporation (Loews) owned approximately 91% of the outstanding common stock
and 100% of the Series H preferred stock of CNAF as of December 31, 2004. CNA serves a wide variety of customers, including small, medium and large businesses; associations;
professionals; and groups and individuals with a broad range of insurance and risk management
products and services. Insurance products primarily include property and casualty coverages. CNA services include risk
management, information services, warranty and claims administration. CNA products and services
are marketed through independent agents, brokers, managing general agents and direct sales. During 2003, CNA completed a strategic review of its operations and decided to concentrate its
efforts on the property and casualty business. As a result of this review, the following actions
in relation to CNAs insurance operations were taken: On April 30, 2004, CNA sold its individual life insurance business. The business sold included
term, universal and permanent life insurance policies and individual annuity products. CNAs
individual long term care and structured settlement businesses were excluded from the sale.
Consideration from the sale was approximately $700 million. CNA recorded a realized investment
loss of $389 million after-tax ($622 million pretax) in 2004. On December 31, 2003, CNA sold the majority of its group benefits business. The business sold
included group life and accident, short and long term disability and certain other products. CNAs
group long term care and specialty medical businesses were excluded from the sale. Consideration
from the sale was approximately $530 million, resulting in an after-tax realized investment loss on
the sale of $122 million ($163 million pretax), including an after-tax realized investment gain of
$8 million ($13 million pretax) recorded in the second quarter of 2004. CNA is continuing to service its existing group and individual long term care commitments and is
managing these businesses as a run-off operation. During 2003, the Company sold the renewal rights for most of the treaty business of CNA Re and
withdrew from the assumed reinsurance business. CNA is managing the run-off of its retained
liabilities. On August 1, 2004, CNA sold the retirement plan trust and recordkeeping business portfolio of CNA
Trust to Union Bank of California. Consideration from the sale was approximately $12 million,
resulting in an after-tax realized investment gain on the sale of $5 million ($9 million pretax).
On November 19, 2004, the charter of CNA Trust was sold to Nevada Security Bank for a nominal fee
and CNA Trust is no longer a subsidiary of CNA. As a result of the strategic review described above, in 2004 CNA changed how it manages its core
operations and makes business decisions. Accordingly, the Company revised its reportable business
segment structure to reflect these changes. CNAs core operations, property and casualty
operations, are now reported in two business segments: Standard Lines and Specialty Lines. CNAs
non-core operations are managed in two segments: Life and Group Non-Core and Corporate and Other
Non-Core. Prior period segment disclosures have been conformed to the current year presentation. 3




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Standard Lines includes standard property and casualty coverages, excess and surplus lines,
and insurance and risk management products. CNA Global (formerly included in Specialty Lines),
which consists of marine and global standard lines, is included in Standard Lines. Specialty Lines includes professional financial and specialty property and casualty
products and services. Life and Group Non-Core includes the results of the life and group lines of business which
have been sold or placed in run-off. This segment also includes Life Operations and Group
Operations (formerly separate reportable segments) and certain run-off life and group operations
formerly included in the Corporate and Other segment. Corporate and Other Non-Core includes the results of several property and casualty and
other lines placed in run-off, including CNA Re (formerly a stand alone property and casualty
segment), and CNA Guaranty and Credit (formerly included in Specialty Lines). This segment also
includes results related to the centralized adjusting and settlement of asbestos and environmental
pollution and mass tort (APMT) claims, participation in voluntary insurance pools and other
non-insurance operations. In 2004, CNA conducted its operations through four operating segments: Standard Lines, Specialty
Lines, Life and Group Non-Core and Corporate and Other Non-Core. These segments are managed
separately because of differences in their product lines and markets. Discussions of each segment
including the products offered, the customers served, the distribution channels used and
competition are set forth in the MD&A included under Item 7 and in Note N of the Consolidated
Financial Statements included under Item 8. Competition The property and casualty insurance industry is highly competitive both as to rate and service.
CNAs consolidated property and casualty subsidiaries compete not only with other stock insurance
companies, but also with mutual insurance companies, reinsurance companies and other entities for
both producers and customers. CNA must continuously allocate resources to refine and improve its
insurance products and services. Rates among insurers vary according to the types of insurers and methods of operation. CNA
competes for business not only on the basis of rate, but also on the basis of availability of
coverage desired by customers, ratings and quality of service, including claim adjustment services. There are approximately 2,400 individual companies that sell property and casualty insurance in the
United States. CNAs consolidated property and casualty subsidiaries ranked as the fourteenth
largest property and casualty insurance organization in the United States based upon 2003 statutory
net written premiums. Regulation The insurance industry is subject to comprehensive and detailed regulation and supervision
throughout the United States. Each state has established supervisory agencies with broad
administrative powers relative to licensing insurers and agents, approving policy forms,
establishing reserve requirements, fixing minimum interest rates for accumulation of surrender
values and maximum interest rates of policy loans, prescribing the form and content of statutory
financial reports and regulating solvency and the type and amount of investments permitted. Such
regulatory powers also extend to premium rate regulations, which require that rates not be
excessive, inadequate or unfairly discriminatory. In addition to regulation of dividends by
insurance subsidiaries, intercompany transfers of assets may be subject to prior notice or approval
by the state insurance regulators, depending on the size of such transfers and payments in relation
to the financial position of the insurance affiliates making the transfer or payment. Insurers are also required by the states to provide coverage to insureds who would not otherwise be
considered eligible by the insurers. Each state dictates the types of insurance and the level of
coverage that must be provided to such involuntary risks. CNAs share of these involuntary risks
is mandatory and generally a function of its respective share of the voluntary market by line of
insurance in each state. 4




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Insurance companies are subject to state guaranty fund and other insurance-related assessments.
Guaranty fund and other insurance-related assessments are levied by the state departments of
insurance to cover claims of insolvent insurers. Reform of the U.S. tort liability system is another issue facing the insurance industry. Over the
last decade, many states have passed some type of reform. In 2004, for example, significant tort
reform measures were enacted in Ohio and Mississippi. Nevertheless, a number of state courts have
recently modified or overturned such reforms. Additionally, new causes of action and theories of
damages continue to be proposed in state court actions or by legislatures. Continued
unpredictability in the law means that insurance underwriting and rating is expected to continue to
be difficult in commercial lines, professional liability and some specialty coverages. Although the Federal Government and its regulatory agencies do not directly regulate the business
of insurance, federal legislative and regulatory initiatives can impact the insurance industry in a
variety of ways. These initiatives and legislation include tort reform proposals; class action
reform proposals; proposals to establish a privately financed trust to process asbestos bodily
injury claims; proposals to overhaul the Superfund hazardous waste removal and liability statutes
and various tax proposals affecting insurance companies. In 1999, Congress passed the Financial
Services Modernization or Gramm-Leach-Bliley Act (GLB Act), which repealed portions of the
Glass-Steagall Act and enabled closer relationships between banks and insurers. Although
functional regulation was preserved by the GLB Act for state oversight of insurance, additional
financial services modernization legislation could include provisions for an alternate federal
system of regulation for insurance companies. On February 18, 2005, President Bush signed into law the Class Action Fairness Act of 2005, which,
with limited exceptions, confers federal jurisdiction over any class action filed after its
enactment involving a putative class of 100 or more members if all aggregated claims exceed $5
million and at least one claimant has diverse residence, for jurisdictional purposes, from at least
one defendant. Federal jurisdiction under the Act may be mandatory, discretionary or disallowed
depending on the composition and citizenship of the class members and certain defendants. The Act
also applies to some individual personal injury lawsuits in which the claims of 100 or more
plaintiffs against the same company have been joined for trial. Certain types of class actions are
exempt from the jurisdictional provisions of the Act, including those against government
defendants, those that involve only a claim regarding a companys internal affairs and certain
types of securities litigation. Closer scrutiny is required of class actions in which the benefit
reaching the class consists of a coupon or voucher, especially where attorneys fees by class
counsel have been requested as part of such a settlement, and a duty on defendants to notify
federal and state officials of every class action settlement is imposed. CNAFs domestic insurance subsidiaries are subject to risk-based capital requirements. Risk-based
capital is a method developed by the National Association of Insurance Commissioners (NAIC) to
determine the minimum amount of statutory capital appropriate for an insurance company to support
its overall business operations in consideration of its size and risk profile. The formula for
determining the risk-based capital requirements specifies various factors, weighted based on the
perceived degree of risk, which are applied to certain financial balances and financial activity.
The adequacy of a companys actual capital is evaluated by a comparison to the risk-based capital
requirements, as determined by the formula. Companies below minimum risk-based capital
requirements are classified within certain levels, each of which determines a specified level of
regulatory attention applicable to a company. As of December 31, 2004 and 2003, all of CNAFs
domestic insurance subsidiaries exceeded the minimum risk-based capital requirements. Subsidiaries with insurance operations outside the United States are also subject to regulation in
the countries in which they operate. CNA has operations in the United Kingdom, Canada and other
countries. Terrorism Insurance Information related to terrorism insurance is set forth in the MD&A included under Item 7. 5




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##### Table of Contents



Reinsurance Information on CNAs reinsurance activities is set forth in the MD&A included under Item 7 and in
Note H of the Consolidated Financial Statements included under Item 8. Employee Relations As of December 31, 2004, CNA had approximately 10,600 employees and has experienced satisfactory
labor relations. CNA has never had work stoppages due to labor disputes. CNA has comprehensive benefit plans for substantially all of its employees, including retirement
plans, savings plans, disability programs, group life programs and group healthcare programs. See
Note J of the Consolidated Financial Statements included under Item 8 for further discussion of
CNAs benefit plans. 6




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##### Table of Contents



Supplementary Insurance Data The following table sets forth supplementary insurance data: Supplementary Insurance Data Years ended December 31
    
    2004
    
    2003
    
    2002(In millions, except ratio information)Trade Ratios  GAAP basis (a)Loss and loss adjustment expense ratio
    
    
    74.6
    %
    
    
    112.0
    %
    
    
    79.8
    %Expense ratio
    
    
    31.5
    
    
    
    37.3
    
    
    
    28.9Dividend ratio
    
    
    0.2
    
    
    
    1.4
    
    
    
    0.9Combined ratio
    
    
    106.3
    %
    
    
    150.7
    %
    
    
    109.6
    %Trade Ratios  Statutory basis (a)Loss and loss adjustment expense ratio
    
    
    78.1
    %
    
    
    118.1
    %
    
    
    79.2
    %Expense ratio
    
    
    27.2
    
    
    
    34.6
    
    
    
    30.1Dividend ratio
    
    
    0.6
    
    
    
    1.2
    
    
    
    1.0Combined Ratio
    
    
    105.9
    %
    
    
    153.9
    %
    
    
    110.3
    %Individual Life and Group Life Insurance Inforce (d)Individual life
    
    $
    11,566
    
    
    $
    330,805
    
    
    $
    345,272Group life
    
    
    45,079
    
    
    
    58,163
    
    
    
    92,479Total
    
    $
    56,645
    
    
    $
    388,968
    
    
    $
    437,751Other Data  Statutory basis (b)Property and casualty companies capital and surplus (c)
    
    $
    6,998
    
    
    $
    6,170
    
    
    $
    6,836Life and group company(ies) capital and surplus
    
    
    1,178
    
    
    
    707
    
    
    
    1,645Property and casualty companies written premiums to surplus ratio
    
    
    1.0
    
    
    
    1.1
    
    
    
    1.3Life companies capital and surplus-percent to total liabilities
    
    
    56.0
    %
    
    
    13.0
    %
    
    
    21.0
    %Participating policyholders-percent of gross life insurance inforce
    
    
    1.4
    %
    
    
    0.5
    %
    
    
    0.4
    %
  (a)
    Trade ratios reflect the results of CNAs property and casualty insurance subsidiaries.
Trade ratios are industry measures of property and casualty underwriting results. The loss
and loss adjustment expense ratio is the percentage of net incurred claim and claim adjustment
expenses and the expenses incurred related to uncollectible reinsurance receivables to net
earned premiums. The primary difference in this ratio between accounting principles generally
accepted in the United States of America (GAAP) and statutory accounting practices (SAP) is
related to the treatment of active life reserves (ALR) related to long term care insurance
products written in property and casualty insurance subsidiaries. For GAAP, ALR is classified
as claim and claim adjustment expense reserves whereas for SAP, ALR is classified as unearned
premium reserves. The expense ratio, using amounts determined in accordance with GAAP, is the
percentage of underwriting and acquisition expenses (including the amortization of deferred
acquisition expenses) to net earned premiums. The expense ratio, using amounts determined in
accordance with SAP, is the percentage of acquisition and underwriting expenses (with no
deferral of acquisition expenses) to net written premiums. The dividend ratio, using amounts
determined in accordance with GAAP, is the ratio of dividends incurred to net earned premiums.
The dividend ratio, using amounts determined in accordance with SAP, is the ratio of
dividends paid to net earned premiums. The combined ratio is the sum of the loss and loss
adjustment expense, expense and dividend ratios.  (b)
    Other data is determined in accordance with SAP. Life and group statutory capital and
surplus as a percent of total liabilities is determined after excluding separate account
liabilities and reclassifying the statutorily required Asset Valuation Reserve to surplus.  (c)
    Surplus includes the property and casualty companies equity ownership of the life and group
company(ies) capital and surplus.  (d)
    The decline in gross inforce is attributable to the sales of the group benefits and the
individual life businesses. See Note H of the Consolidated Financial Statements included
under Item 8 for additional inforce information. 7




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The following table displays the distribution of gross written premiums for CNAs operations
by geographic concentration. Gross Written Premiums Percent of TotalYears ended December 31
    
    2004
    
    2003
    
    2002California
    
    
    9.3
    %
    
    
    8.5
    %
    
    
    7.7
    %New York
    
    
    7.9
    
    
    
    7.3
    
    
    
    7.2Florida
    
    
    7.1
    
    
    
    7.6
    
    
    
    6.7Texas
    
    
    5.4
    
    
    
    5.7
    
    
    
    6.2New Jersey
    
    
    5.3
    
    
    
    4.5
    
    
    
    4.6Illinois
    
    
    5.1
    
    
    
    9.3
    
    
    
    9.1Pennsylvania
    
    
    4.7
    
    
    
    4.2
    
    
    
    4.5Massachusetts
    
    
    3.2
    
    
    
    3.1
    
    
    
    2.8All other states, countries or political subdivisions (a)
    
    
    52.0
    
    
    
    49.8
    
    
    
    51.2Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  (a)
    No other individual state, country or political subdivision accounts for more than 3.0% of
gross written premiums. Approximately 5.0%, 3.2% and 3.5% of CNAs gross written premiums were derived from outside of
the United States for the years ended December 31, 2004, 2003 and 2002. Gross written premiums
from the United Kingdom were approximately 2.3%, 1.8%, and 1.7% of CNAs premiums for the years
ended December 31, 2004, 2003 and 2002. Premiums from any individual foreign country excluding the
United Kingdom were not significant. Property and Casualty Claim and Claim Adjustment Expenses The following loss reserve development table illustrates the change over time of reserves
established for property and casualty claim and claim adjustment expenses at the end of the
preceding ten calendar years for CNAs property and casualty insurance operations. The table excludes the life subsidiaries, and as such, the
carried reserves will not agree to the Consolidated Financial Statements included under Item 8.
The first section shows the reserves as originally reported at the end of the stated year. The
second section, reading down, shows the cumulative amounts paid as of the end of successive years
with respect to the originally reported reserve liability. The third section, reading down, shows
re-estimates of the originally recorded reserves as of the end of each successive year, which is
the result of the Companys property and casualty insurance subsidiaries expanded awareness of
additional facts and circumstances that pertain to the unsettled claims. The last section compares
the latest re-estimated reserves to the reserves originally established, and indicates whether the
original reserves were adequate or inadequate to cover the estimated costs of unsettled claims. The loss reserve development table for property and casualty companies is cumulative and,
therefore, ending balances should not be added since the amount at the end of each calendar year
includes activity for both the current and prior years. Additionally, the development amounts in
the table below are the amounts prior to consideration of any related reinsurance bad debt
allowance impacts. 8




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##### Table of Contents



Schedule of Loss Reserve Development Calendar Year Ended
    
    1994 (a)
    
    1995 (b)
    
    1996
    
    1997
    
    1998
    
    1999 (c)
    
    2000
    
    2001 (d)
    
    2002 (e)
    
    2003
    
    2004(In millions)Originally reported gross
reserves for unpaid claim
and claim adjustment
expenses
    
    $
    21,639
    
    
    $
    31,044
    
    
    $
    29,357
    
    
    $
    28,533
    
    
    $
    28,317
    
    
    $
    26,631
    
    
    $
    26,408
    
    
    $
    29,551
    
    
    $
    25,648
    
    
    $
    31,282
    
    
    $
    31,201Originally reported ceded
recoverable
    
    
    2,705
    
    
    
    6,089
    
    
    
    5,660
    
    
    
    5,326
    
    
    
    5,424
    
    
    
    6,273
    
    
    
    7,568
    
    
    
    11,798
    
    
    
    10,583
    
    
    
    13,997
    
    
    
    13,788Originally reported net
reserves for unpaid claim
and claim adjustment
expenses
    
    $
    18,934
    
    
    $
    24,955
    
    
    $
    23,697
    
    
    $
    23,207
    
    
    $
    22,893
    
    
    $
    20,358
    
    
    $
    18,840
    
    
    $
    17,753
    
    
    $
    15,065
    
    
    $
    17,285
    
    
    $
    17,413Cumulative net paid as of:One year later
    
    $
    3,656
    
    
    $
    6,510
    
    
    $
    5,851
    
    
    $
    5,954
    
    
    $
    7,321
    
    
    $
    6,546
    
    
    $
    7,686
    
    
    $
    5,981
    
    
    $
    5,373
    
    
    $
    4,341
    
    
    $
    Two years later
    
    
    7,087
    
    
    
    10,485
    
    
    
    9,796
    
    
    
    11,394
    
    
    
    12,241
    
    
    
    11,935
    
    
    
    11,988
    
    
    
    10,355
    
    
    
    8,727
    
    
    
    
    
    
    
    Three years later
    
    
    9,195
    
    
    
    13,363
    
    
    
    13,602
    
    
    
    14,423
    
    
    
    16,020
    
    
    
    15,247
    
    
    
    15,291
    
    
    
    12,912
    
    
    
    
    
    
    
    
    
    
    
    Four years later
    
    
    10,624
    
    
    
    16,271
    
    
    
    15,793
    
    
    
    17,042
    
    
    
    18,271
    
    
    
    18,136
    
    
    
    17,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Five years later
    
    
    12,577
    
    
    
    17,947
    
    
    
    17,736
    
    
    
    18,568
    
    
    
    20,779
    
    
    
    19,586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Six years later
    
    
    13,472
    
    
    
    19,465
    
    
    
    18,878
    
    
    
    20,723
    
    
    
    21,928
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Seven years later
    
    
    14,394
    
    
    
    20,410
    
    
    
    20,828
    
    
    
    21,608
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Eight years later
    
    
    15,024
    
    
    
    22,237
    
    
    
    21,567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nine years later
    
    
    15,602
    
    
    
    22,883
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ten years later
    
    
    16,158
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net reserves re-estimated
as of:End of initial year
    
    $
    18,934
    
    
    $
    24,955
    
    
    $
    23,697
    
    
    $
    23,207
    
    
    $
    22,893
    
    
    $
    20,358
    
    
    $
    18,840
    
    
    $
    17,753
    
    
    $
    15,065
    
    
    $
    17,285
    
    
    $
    17,413One year later
    
    
    18,922
    
    
    
    24,864
    
    
    
    23,441
    
    
    
    23,470
    
    
    
    23,920
    
    
    
    20,785
    
    
    
    21,306
    
    
    
    17,805
    
    
    
    17,496
    
    
    
    17,520
    
    
    
    Two years later
    
    
    18,500
    
    
    
    24,294
    
    
    
    23,102
    
    
    
    23,717
    
    
    
    23,774
    
    
    
    22,903
    
    
    
    21,377
    
    
    
    20,368
    
    
    
    18,095
    
    
    
    
    
    
    
    Three years later
    
    
    18,088
    
    
    
    23,814
    
    
    
    23,270
    
    
    
    23,414
    
    
    
    25,724
    
    
    
    22,780
    
    
    
    23,890
    
    
    
    20,945
    
    
    
    
    
    
    
    
    
    
    
    Four years later
    
    
    17,354
    
    
    
    24,092
    
    
    
    22,977
    
    
    
    24,751
    
    
    
    25,407
    
    
    
    25,293
    
    
    
    24,420
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Five years later
    
    
    17,506
    
    
    
    23,854
    
    
    
    24,105
    
    
    
    24,330
    
    
    
    27,456
    
    
    
    25,703
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Six years later
    
    
    17,248
    
    
    
    24,883
    
    
    
    23,736
    
    
    
    26,037
    
    
    
    27,782
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Seven years later
    
    
    17,751
    
    
    
    24,631
    
    
    
    25,250
    
    
    
    26,239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Eight years later
    
    
    17,650
    
    
    
    26,023
    
    
    
    25,437
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nine years later
    
    
    18,193
    
    
    
    26,169
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ten years later
    
    
    18,230
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net (deficiency)
redundancy
    
    $
    704
    
    
    $
    (1,214
    )
    
    $
    (1,740
    )
    
    $
    (3,032
    )
    
    $
    (4,889
    )
    
    $
    (5,345
    )
    
    $
    (5,580
    )
    
    $
    (3,192
    )
    
    $
    (3,030
    )
    
    $
    (235
    )
    
    $
    Reconciliation to gross
re-estimated reserves:Net reserves re-estimated
    
    $
    18,230
    
    
    $
    26,169
    
    
    $
    25,437
    
    
    $
    26,239
    
    
    $
    27,782
    
    
    $
    25,703
    
    
    $
    24,420
    
    
    $
    20,945
    
    
    $
    18,095
    
    
    $
    17,520
    
    
    $
    Re-estimated ceded
recoverable
    
    
    2,992
    
    
    
    8,479
    
    
    
    7,650
    
    
    
    7,052
    
    
    
    7,475
    
    
    
    9,745
    
    
    
    10,734
    
    
    
    16,526
    
    
    
    15,850
    
    
    
    14,410
    
    
    
    Total gross re-estimated
reserves
    
    $
    21,222
    
    
    $
    34,648
    
    
    $
    33,087
    
    
    $
    33,291
    
    
    $
    35,257
    
    
    $
    35,448
    
    
    $
    35,154
    
    
    $
    37,471
    
    
    $
    33,945
    
    
    $
    31,930
    
    
    $
    Net (deficiency)
redundancy related to:Asbestos claims
    
    $
    (2,126
    )
    
    $
    (2,354
    )
    
    $
    (2,456
    )
    
    $
    (2,354
    )
    
    $
    (2,111
    )
    
    $
    (1,534
    )
    
    $
    (1,469
    )
    
    $
    (697
    )
    
    $
    (696
    )
    
    $
    (54
    )
    
    $
    Environmental and mass
tort claims
    
    
    (727
    )
    
    
    (770
    )
    
    
    (715
    )
    
    
    (739
    )
    
    
    (520
    )
    
    
    (620
    )
    
    
    (610
    )
    
    
    (148
    )
    
    
    (151
    )
    
    
    (1
    )
    
    
    Total asbestos,
environmental and mass
tort
    
    
    (2,853
    )
    
    
    (3,124
    )
    
    
    (3,171
    )
    
    
    (3,093
    )
    
    
    (2,631
    )
    
    
    (2,154
    )
    
    
    (2,079
    )
    
    
    (845
    )
    
    
    (847
    )
    
    
    (55
    )
    
    
    Other claims
    
    
    3,557
    
    
    
    1,910
    
    
    
    1,431
    
    
    
    61
    
    
    
    (2,258
    )
    
    
    (3,191
    )
    
    
    (3,501
    )
    
    
    (2,347
    )
    
    
    (2,183
    )
    
    
    (180
    )
    
    
    Total net (deficiency)
redundancy
    
    $
    704
    
    
    $
    (1,214
    )
    
    $
    (1,740
    )
    
    $
    (3,032
    )
    
    $
    (4,889
    )
    
    $
    (5,345
    )
    
    $
    (5,580
    )
    
    $
    (3,192
    )
    
    $
    (3,030
    )
    
    $
    (235
    )
    
    $
    
 9




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##### Table of Contents



(a)
    Reflects reserves of CNAs property and casualty insurance subsidiaries, excluding reserves
for CIC and its insurance affiliates, which were acquired on May 10, 1995 (the Acquisition
Date). Accordingly, the reserve development (net reserves recorded at the end of the year, as
initially estimated, less net reserves re-estimated as of subsequent years) does not include
CIC.  (b)
    Includes CIC gross reserves of $9,713 million and net reserves of $6,063 million acquired on
the Acquisition Date and subsequent development thereon.  (c)
    Ceded recoverable includes reserves transferred under retroactive reinsurance agreements of
$784 million as of December 31, 1999.  (d)
    Effective January 1, 2001, CNA established a new life insurance company, CNA Group Life
Assurance Company (CNAGLA). Further, on January 1, 2001 approximately $1,055 million of
reserves were transferred from CCC to CNAGLA.  (e)
    Effective October 31, 2002, CNA sold CNA Reinsurance Company Limited (CNA Re U.K.). As a
result of the sale, net reserves were reduced by approximately $1,316 million. See Note P of
the Consolidated Financial Statements included under Item 8 for further discussion of the
sale. Additional information as to CNAs property and casualty claim and claim adjustment expense
reserves and reserve development is set forth in the MD&A included under Item 7 and in Notes A and
F of the Consolidated Financial Statements included under Item 8. Investments Information on the Companys investments is set forth in the MD&A included under Item 7 and in
Notes A, B, C and D of the Consolidated Financial Statements included under Item 8. Available Information CNA files annual, quarterly and current reports, proxy statements and other documents with the
Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act).
The public may read and copy any materials that CNA files with the SEC at the SECs Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC
maintains an Internet site that contains reports, proxy and information statements, and other
information regarding issuers, including CNA, that file electronically with the SEC. The public
can obtain any documents that CNA files with the SEC at http://www.sec.gov. CNA also makes available free of charge on or through its internet website (http://www.cna.com)
CNAs Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after CNA electronically files such material with, or
furnishes it to, the SEC. Copies of these reports may also be obtained, free of charge, upon
written request to: CNA Financial Corporation, CNA Center, 43 South, Chicago, IL 60685, Attn.
Jonathan D. Kantor, Executive Vice President, General Counsel and Secretary. 10




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##### Table of Contents



ITEM 2. PROPERTIES CNA Center, owned by CAC, a wholly owned subsidiary of CCC, serves as the home office for CNAF and
its subsidiaries. CNAFs subsidiaries own or lease office space in various cities throughout the
United States and in other countries. The following table sets forth certain information with
respect to the principal office buildings owned or leased by CNAFs subsidiaries: Amount (SquareFeet) of BuildingOwned and Occupiedor Leased andLocation
    
    Occupied by CNA
    
    Principal UsageCNA Center, 333 S. Wabash, Chicago, Illinois
    
    897,490(a)
    
    Principal executive offices of CNAF2405 Lucien Way, Maitland, Florida
    
    128,267(b)
    
    Property and casualty insurance offices40 Wall Street, New York, New York
    
    126,147(b)
    
    Property and casualty insurance offices3500 Lacey Road, Downers Grove, Illinois
    
    117,749(b)
    
    Property and casualty insurance offices600 N. Pearl Street, Dallas, Texas
    
    95,828(b)
    
    Property and casualty insurance offices675 Placentia Avenue, Brea, California
    
    88,031(b)
    
    Property and casualty insurance offices1111 E. Broad Street, Columbus, Ohio
    
    83,702(a)
    
    Property and casualty insurance offices401 Penn Street, Reading, Pennsylvania
    
    71,178(a)
    
    Property and casualty insurance offices1100
Cornwall Road, Monmouth Junction, New Jersey
    
    46,515(b)
    
    Property and casualty insurance offices100 CNA Drive, Nashville, Tennessee
    
    19,981(b)
    
    Life insurance offices
  (a)
    Represents property owned by CNAF or its subsidiaries.(b)
    Represents property leased by CNAF or its subsidiaries. 
 ITEM 3. LEGAL PROCEEDINGS Information on CNAs legal proceedings is set forth in Note F and G of the Consolidated Financial
Statements included under Item 8. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 11




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES CNAFs common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange and the
Pacific Exchange, and is traded on the Philadelphia Stock Exchange, under the symbol CNA. As of February 21, 2005, CNAF had 255,953,958 shares of common stock outstanding. Approximately
91% of CNAFs outstanding common stock is owned by Loews. CNAF had 2,254 stockholders of record as
of February 21, 2005 according to the records maintained by the Companys transfer agent. During 2003 CNAF sold $750 million of its participating convertible preferred stock, Series I
Issue, to Loews. The preferred stock converted into 32,327,015 shares of CNAF common stock on
April 20, 2004. The number of shares was determined utilizing a conversion price per share of
common stock that was based on average market prices of CNAF common stock from November 17, 2003
through November 21, 2003. The terms of the Series I Issue were approved by a special committee of
independent members of CNAFs Board of Directors. Following conversion, Loews owned approximately
91% of CNAFs outstanding common stock of approximately 256.0 million shares. The proceeds from
the Series I Issue were applied by CNAF to increase the statutory surplus of CNAFs principal
insurance subsidiary, CCC. The issuance of the Series I Issue was exempt from registration under
Section 4(2) of the Securities Act of 1933. During 2002, CNAF sold $750 million of a then new issue of preferred stock, designated Series H
Cumulative Preferred Issue (Series H Issue), to Loews. The terms of the Series H Issue were
approved by a special committee of independent members of CNAFs Board of Directors. The proceeds
from the Series H Issue were applied by CNAF to increase the statutory surplus of CNAFs principal
insurance subsidiary, CCC. The Series H Issue accrues cumulative dividends at an initial rate of 8% per year, compounded
annually. It will be adjusted quarterly to a rate equal to 400 basis points above the ten-year
U.S. Treasury rate beginning with the quarterly dividend after the first triggering event to occur
of either (i) an increase by two intermediate rating levels of the financial strength rating of CCC
from its rating at the time of issuance by any of A.M. Best Company, Standard & Poors or Moodys
Investor Services or (ii) one year following an increase by one intermediate rating level of the
financial strength rating of CCC by any one of those rating agencies. Accrued but unpaid
cumulative dividends cannot be paid on the Series H Issue unless and until one of the two
triggering events described above has occurred. Beginning with the quarter following an increase
of one intermediate rating level in CCCs financial strength rating, however, current (but not
accrued cumulative) quarterly dividends can be paid. As of February 21, 2005, there has not been
any change to CCCs financial strength rating from its rating at the time of issuance. As of
December 31, 2004, the Company has $127 million of undeclared (and therefore unrecorded)
accumulated dividends. The Series H Issue is senior to CNAFs common stock as to the payment of dividends and amounts
payable upon any liquidation, dissolution or winding up. No dividends may be declared on CNAFs
common stock until all cumulative dividends on the Series H Issue have been paid. CNAF may not
issue any equity securities ranking senior to or on par with the Series H Issue without the consent
of a majority of its stockholders. The Series H Issue is non-voting and is not convertible into
any other securities of CNAF. It may be redeemed only upon the mutual agreement of CNAF and a
majority of the stockholders of the preferred stock. The issuance of the Series H Issue was exempt
from registration under Section 4(2) of the Securities Act of 1933. 12




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##### Table of Contents



The table below shows the high and low closing sales prices for CNAFs common stock based on the
New York Stock Exchange Composite Transactions. Common Stock Information 2004
    
    2003High
    
    Low
    
    High
    
    LowQuarter:Fourth
    
    
    $27.06
    
    
    
    $22.17
    
    
    
    $24.50
    
    
    
    $18.57Third
    
    
    29.54
    
    
    
    23.98
    
    
    
    25.65
    
    
    
    20.87Second
    
    
    30.49
    
    
    
    26.32
    
    
    
    26.50
    
    
    
    22.26First
    
    
    28.65
    
    
    
    24.52
    
    
    
    27.35
    
    
    
    21.21
 No dividends have been paid on CNAFs common stock in 2004 or 2003. CNAFs ability to pay
dividends is influenced, in part, by dividend restrictions of its principal operating insurance
subsidiaries as described in the MD&A included under Item 7 and in Note L to the Consolidated
Financial Statements included under Item 8. Additional information on
CNAFs common stock repurchases is included in Note L to the
Consolidated Financial Statements included under Item 8. 13




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial data. Selected Financial Data As of and for the Years Ended December 31
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000(In millions, except per share data and ratios)Results of Operations:Revenues
    
    $
    9,930
    
    
    $
    11,716
    
    
    $
    12,286
    
    
    $
    13,089
    
    
    $
    15,408Income (loss) from continuing operations
    
    $
    441
    
    
    $
    (1,433
    )
    
    $
    247
    
    
    $
    (1,592
    )
    
    $
    1,177Income (loss) from discontinued
operations, net of tax
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    11
    
    
    
    5Cumulative effects of changes in
accounting principles, net of tax
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    (61
    )
    
    
    Net income (loss)
    
    $
    441
    
    
    $
    (1,433
    )
    
    $
    155
    
    
    $
    (1,642
    )
    
    $
    1,182Earnings (loss) per Share:Income (loss) from continuing operations
    
    $
    1.47
    
    
    $
    (6.58
    )
    
    $
    1.10
    
    
    $
    (8.20
    )
    
    $
    6.40Income (loss) from discontinued
operations, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.16
    )
    
    
    0.06
    
    
    
    0.03Cumulative effects of changes in
accounting principles, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.26
    )
    
    
    (0.32
    )
    
    
    Earnings (loss) per share available to
common stockholders
    
    $
    1.47
    
    
    $
    (6.58
    )
    
    $
    0.68
    
    
    $
    (8.46
    )
    
    $
    6.43Financial Condition:Total investments
    
    $
    39,231
    
    
    $
    38,100
    
    
    $
    35,293
    
    
    $
    35,826
    
    
    $
    36,059Total assets
    
    
    62,500
    
    
    
    68,612
    
    
    
    61,731
    
    
    
    65,723
    
    
    
    62,785Insurance reserves
    
    
    43,650
    
    
    
    45,492
    
    
    
    40,179
    
    
    
    43,623
    
    
    
    39,054Long and short term debt
    
    
    2,257
    
    
    
    1,904
    
    
    
    2,292
    
    
    
    2,567
    
    
    
    2,729Stockholders equity
    
    
    9,207
    
    
    
    8,952
    
    
    
    9,401
    
    
    
    8,122
    
    
    
    9,400Book value per share
    
    $
    32.55
    
    
    $
    31.80
    
    
    $
    38.68
    
    
    $
    36.33
    
    
    $
    51.29Statutory Surplus:Property and casualty companies (a)
    
    $
    6,998
    
    
    $
    6,170
    
    
    $
    6,836
    
    
    $
    6,241
    
    
    $
    8,373Life and group insurance company(ies)
    
    
    1,178
    
    
    
    707
    
    
    
    1,645
    
    
    
    1,752
    
    
    
    1,274
  (a)
    Surplus includes the property and casualty companies equity ownership of the life and group
company(ies) capital and surplus. 14




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following discussion highlights significant factors impacting the consolidated operations and
financial condition of CNA Financial Corporation (CNAF) and its subsidiaries (collectively CNA or
the Company). Based on 2003 statutory net written premiums, CNA is the fourteenth largest property
and casualty company. Loews Corporation (Loews) owned approximately 91% of the outstanding common stock and 100% of the
preferred stock of CNAF as of December 31, 2004. The following discussion should be read in
conjunction with Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary
Data. Managements discussion and analysis of financial condition and results of operations is comprised
of the following sections: Page No.Consolidated Operations
    
    
    16Net Prior Year Development
    
    
    18Strategic Review
    
    
    20Critical Accounting Estimates
    
    
    24Reserves  Estimates and Uncertainties
    
    
    26Reinsurance
    
    
    29Terrorism Insurance
    
    
    33Restructuring
    
    
    33Segment Results
    
    
    35Standard Lines
    
    
    35Specialty Lines
    
    
    43Life and Group Non-Core
    
    
    47Corporate and Other Non-Core
    
    
    49Asbestos and Environmental Pollution and Mass Tort (APMT) Reserves
    
    
    52Investments
    
    
    65Net Investment Income
    
    
    65Net Realized Investment Gains (Losses)
    
    
    66Valuation and Impairment of Investments
    
    
    69Liquidity and Capital Resources
    
    
    76Cash Flows
    
    
    76Debt
    
    
    78Related Parties
    
    
    79Commitments, Contingencies, and Guarantees
    
    
    81Regulatory Matters
    
    
    82Ratings
    
    
    83Dividends from Subsidiaries
    
    
    84Loews
    
    
    85Accounting Pronouncements
    
    
    85Forward-Looking Statements
    
    
    86
 15




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##### Table of Contents



CONSOLIDATED OPERATIONS Results of Operations The following table includes the consolidated results of operations. For more detailed components
of CNAs business operations, see the segment discussions within this MD&A. Consolidated Operations Years ended December 31
    
    2004
    
    2003
    
    2002(In millions, except per share data)RevenuesNet earned premiums
    
    $
    8,209
    
    
    $
    9,214
    
    
    $
    10,213Net investment income
    
    
    1,674
    
    
    
    1,647
    
    
    
    1,730Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    (248
    )
    
    
    460
    
    
    
    (252
    )Other revenues
    
    
    295
    
    
    
    395
    
    
    
    595Total revenues
    
    
    9,930
    
    
    
    11,716
    
    
    
    12,286Claims, benefits and expensesInsurance claims and policyholders benefits
    
    
    6,446
    
    
    
    10,287
    
    
    
    8,420Amortization of deferred acquisition costs
    
    
    1,680
    
    
    
    1,965
    
    
    
    1,791Other operating expenses
    
    
    1,183
    
    
    
    1,686
    
    
    
    1,621Restructuring and other related charges
    
    
    
    
    
    
    
    
    
    
    (37
    )Interest
    
    
    124
    
    
    
    130
    
    
    
    150Total claims, benefits and expenses
    
    
    9,433
    
    
    
    14,068
    
    
    
    11,945Income (loss) from continuing operations before income tax and minority interest
    
    
    497
    
    
    
    (2,352
    )
    
    
    341Income tax (expense) benefit
    
    
    (29
    )
    
    
    913
    
    
    
    (68
    )Minority interest
    
    
    (27
    )
    
    
    6
    
    
    
    (26
    )Income (loss) from continuing operations
    
    
    441
    
    
    
    (1,433
    )
    
    
    247Loss from discontinued operations, net of tax of $9
    
    
    
    
    
    
    
    
    
    
    (35
    )Income (loss) before cumulative effects of changes in accounting principle
    
    
    441
    
    
    
    (1,433
    )
    
    
    212Cumulative effect of change in accounting principles, net of tax of $7
    
    
    
    
    
    
    
    
    
    
    (57
    )Net income (loss)
    
    $
    441
    
    
    $
    (1,433
    )
    
    $
    155Basic and diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    1.47
    
    
    $
    (6.58
    )
    
    $
    1.10Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.16
    )Income (loss) before cumulative effect of change in accounting principles
    
    
    1.47
    
    
    
    (6.58
    )
    
    
    0.94Cumulative effect of change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.26
    )Basic and diluted earnings (loss) per share available to common stockholders
    
    $
    1.47
    
    
    $
    (6.58
    )
    
    $
    0.68Weighted average outstanding common stock and common stock equivalents
    
    
    256.0
    
    
    
    227.0
    
    
    
    223.6
 2004 Compared with 2003 Net results increased $1,874 million in 2004 as compared with 2003. This improvement in net
results was due principally to decreased net unfavorable prior year development of $1,838 million
after-tax ($2,827 million pretax), $356 million after-tax ($547 million pretax) decrease in the bad
debt provisions for insurance and reinsurance receivables, $66 million after-tax ($101 million
pretax) decrease in interest expenses related to additional cessions to corporate aggregate
reinsurance treaties and $59 million after-tax ($90 million pretax) decrease in certain insurance
related assessments. These favorable impacts to net income in 2004 were partially offset by
increased catastrophe losses and decreased net realized investment results. The impact of
catastrophes was $196 million after-tax ($301 16




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##### Table of Contents



million pretax) and $93 million after-tax ($143 million pretax) in 2004 and 2003. This increase was primarily due to catastrophe impacts of $178
million after-tax ($273 million pretax) recorded in 2004 resulting from Hurricanes Charley,
Frances, Ivan and Jeanne. These impacts are net of anticipated reinsurance recoveries, and include
the effect of reinstatement premiums and estimated insurance assessments. Unfavorable net prior year development of $125 million, including $241 million of unfavorable claim
and claim adjustment expense reserve development and $116 million of favorable premium development,
was recorded in 2004. Unfavorable net prior year development of $2,952 million, including $2,409
million of unfavorable claim and claim adjustment expense reserve development and $543 million of
unfavorable premium development, was recorded in 2003. Net realized investment results decreased $438 million after-tax in 2004 as compared with 2003.
This decrease in investment results was primarily due to the loss on the sale of the individual
life insurance business of $389 million after-tax ($622 million pretax) and losses on derivatives
of $55 million after-tax ($84 million pretax). These decreases were partly offset by a $105
million after-tax ($162 million pretax) gain on the disposition of the Companys equity holdings of
Canary Wharf Group PLC (Canary Wharf), a London-based real estate
company, and a reduction in
impairment losses for other-than-temporary declines in market values for fixed maturity and equity
securities. Impairment losses of $60 million after-tax ($93 million pretax) were recorded in 2004
across various sectors, including an after-tax impairment loss of $36 million ($56 million pretax)
related to loans made under a credit facility to a national contractor, while in 2003 impairment
losses of $209 million after-tax ($321 million pretax) were recorded across various sectors
including the airline, healthcare and energy industries. Net earned premiums decreased $1,005 million in 2004 as compared with 2003. The decrease in net
earned premiums was due primarily to reduced premiums from the individual life and group benefits
businesses, as well as CNA Re, as a result of the decisions made in 2003 to focus on the core
property and casualty business. Partially offsetting these unfavorable impacts was a $357 million
decrease in premiums ceded to corporate aggregate and other reinsurance treaties in 2004 as
compared to 2003. The 2003 cessions were principally due to the unfavorable net prior year
development recorded in 2003. 2003 Compared with 2002 Net results decreased $1,588 million in 2003 as compared with 2002. The decline in net results was
due primarily to increased unfavorable net prior year development of $1,837 million after-tax
($2,826 million pretax), a $55 million after-tax ($84 million pretax) increase in catastrophe
losses, a $65 million after-tax ($100 million pretax) increase in unallocated loss adjustment
expense (ULAE) reserves and a $27 million after-tax ($42 million pretax) increase in dividend
development. In addition, net results in 2003 included a $396 million after-tax ($610 million
pretax) increase in the bad debt provision for insurance and reinsurance receivables, a $69 million
after-tax ($104 million pretax) increase in insurance related assessments and increased interest
expense of $90 million after-tax ($137 million pretax) related to additional cessions to the
corporate aggregate and other reinsurance treaties. These items were partially offset by a $434
million after-tax ($712 million pretax) increase in net realized investment results and increased
limited partnership income of $165 million after-tax ($254 million pretax). Net income in 2002
also included a $35 million after-tax ($44 million pretax) loss from discontinued operations and a
$57 million after-tax ($64 million pretax) charge for the cumulative effect of a change in
accounting principle. Unfavorable net prior year development of $2,952 million, including $2,409 million of unfavorable
claim and claim adjustment expense reserve development and $543 million of unfavorable premium
development, was recorded in 2003. Unfavorable net prior year development of $126 million,
including $35 million of unfavorable claim and claim adjustment expense reserve development and $91
million of unfavorable premium development, was recorded in 2002. Net realized investment results increased $434 million after-tax in 2003 as compared with 2002.
This change was due primarily to $209 million after-tax ($321 million pretax) of impairment losses
for other-than-temporary declines in market values for fixed maturity and equity securities
recorded in 2003 as compared to $578 million after-tax ($890 million pretax) recorded in 2002.
Also contributing to this increase were improved realized results related to fixed maturity and
derivative securities in 2003. These increases were partially offset by the $130 million after-tax
($176 million pretax) recorded loss on the sale of the Group Benefits business. See the
Investments section of this MD&A for further details. 17




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##### Table of Contents



The loss from discontinued operations of $35 million after-tax in 2002 related to the results of
CNA Vida, CNAs Chilean-based life insurer, which was sold during 2002. The cumulative effect of a change in accounting principle in 2002 related to the adoption of
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142). During 2002, the Company completed its initial goodwill impairment testing and
recorded a $57 million after-tax ($64 million pretax) impairment charge. The impairment charge
consisted of a $43 million after-tax ($43 million pretax) charge in Standard Lines, a $5 million
after-tax ($8 million pretax) charge in Specialty Lines, an $8 million after-tax ($12 million
pretax) charge in Life and Group Non-Core, and a $1 million after-tax ($1 million pretax) charge in
Corporate and Other Non-Core. Net earned premiums decreased $999 million in 2003 as compared with the same period in 2002. The
decrease in net earned premiums was due primarily to the July 1, 2002 transfer of the National
Postal Mail Handlers Union group benefits plan (the Mail Handlers Plan) to First Health
Corporation. Net earned premiums for the Mail Handlers Plan were $1,151 million in 2002. Net
earned premium was also impacted by increased ceded premiums to corporate aggregate and other
reinsurance treaties resulting from unfavorable net prior year development recorded in 2003.
Partially offsetting these adverse premium items were rate increases, increased retention and new
business, primarily in Standard Lines and Specialty Lines. Net Prior Year Development The results of operations for the years ended December 31, 2004, 2003 and 2002 were impacted by net
prior year development recorded for the property and casualty and the Corporate and Other Non-Core
segments. Changes in estimates of claim and allocated claim adjustment expense reserves and
premium accruals for prior accident years are defined as net prior year development within this
MD&A. These changes can be favorable or unfavorable. The development discussed below is the
amount prior to consideration of any related reinsurance allowance impacts. The following tables summarize pretax net prior year development by segment for the property and
casualty segments and the Corporate and Other Non-Core segment for the years ended December 31,
2004, 2003 and 2002. 18




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##### Table of Contents



The following table summarizes the pretax 2004 net prior year development by segment. 2004 Net Prior Year Development CorporateStandard
    
    Specialty
    
    and OtherLines
    
    Lines
    
    Non-Core
    
    Total(In millions)Pretax unfavorable net prior year claim and
allocated claim adjustment expense development
excluding the impact of corporate aggregate
reinsurance treaties:Property and casualty, excluding APMT
    
    $
    105
    
    
    $
    75
    
    
    $
    23
    
    
    $
    203APMT
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    55Total
    
    
    105
    
    
    
    75
    
    
    
    78
    
    
    
    258Ceded losses related to corporate aggregate
reinsurance treaties
    
    
    8
    
    
    
    (17
    )
    
    
    9
    
    
    
    Pretax unfavorable net prior year development
before impact of premium development
    
    
    113
    
    
    
    58
    
    
    
    87
    
    
    
    258Unfavorable (favorable) premium
development, excluding impact of corporate
aggregate reinsurance treaties
    
    
    (96
    )
    
    
    (33
    )
    
    
    12
    
    
    
    (117
    )Ceded premiums related to corporate
aggregate reinsurance treaties
    
    
    (1
    )
    
    
    5
    
    
    
    (3
    )
    
    
    1Pretax unfavorable (favorable) premium development
    
    
    (97
    )
    
    
    (28
    )
    
    
    9
    
    
    
    (116
    )Total 2004 unfavorable net prior year
development (pretax)
    
    $
    16
    
    
    $
    30
    
    
    $
    96
    
    
    $
    142Total 2004 unfavorable net prior year development
(after-tax)
    
    $
    10
    
    
    $
    20
    
    
    $
    62
    
    
    $
    92
 The following table summarizes the pretax 2003 net prior year development by segment. 2003 Net Prior Year Development CorporateStandard
    
    Specialty
    
    and OtherLines
    
    Lines
    
    Non-Core
    
    Total(In millions)Pretax unfavorable net prior year claim
and allocated claim adjustment expense
development excluding the impact of
corporate aggregate reinsurance treaties:Property and casualty, excluding APMT
    
    $
    1,424
    
    
    $
    313
    
    
    $
    355
    
    
    $
    2,092APMT
    
    
    
    
    
    
    
    
    
    
    795
    
    
    
    795Total
    
    
    1,424
    
    
    
    313
    
    
    
    1,150
    
    
    
    2,887Ceded losses related to corporate
aggregate reinsurance treaties
    
    
    (485
    )
    
    
    (56
    )
    
    
    (102
    )
    
    
    (643
    )Pretax unfavorable net prior year
development before impact of premium
development
    
    
    939
    
    
    
    257
    
    
    
    1,048
    
    
    
    2,244Unfavorable (favorable) premium
development, excluding impact of
corporate aggregate reinsurance
treaties
    
    
    211
    
    
    
    6
    
    
    
    (32
    )
    
    
    185Ceded premiums related to corporate
aggregate reinsurance treaties
    
    
    269
    
    
    
    31
    
    
    
    58
    
    
    
    358Pretax unfavorable premium development
    
    
    480
    
    
    
    37
    
    
    
    26
    
    
    
    543Total 2003 unfavorable net prior year
development (pretax)
    
    $
    1,419
    
    
    $
    294
    
    
    $
    1,074
    
    
    $
    2,787Total 2003 unfavorable net prior year
development (after-tax)
    
    $
    922
    
    
    $
    191
    
    
    $
    698
    
    
    $
    1,811
 19




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##### Table of Contents



The following table summarizes the pretax 2002 net prior year development by segment. 2002 Net Prior Year Development CorporateStandard
    
    Specialty
    
    and OtherLines
    
    Lines
    
    Non-Core
    
    Total(In millions)Pretax unfavorable (favorable) net prior year
claim and allocated claim adjustment expense
development excluding the impact of corporate
aggregate reinsurance treaties:Property and casualty, excluding APMT
    
    $
    (191
    )
    
    $
    55
    
    
    $
    248
    
    
    $
    112APMT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    (191
    )
    
    
    55
    
    
    
    248
    
    
    
    112Ceded losses related to corporate aggregate
reinsurance treaties
    
    
    (14
    )
    
    
    (41
    )
    
    
    (93
    )
    
    
    (148
    )Pretax unfavorable (favorable) net prior year
development before impact of premium development
    
    
    (205
    )
    
    
    14
    
    
    
    155
    
    
    
    (36
    )Unfavorable (favorable) premium
development, excluding impact of corporate
aggregate reinsurance treaties
    
    
    76
    
    
    
    17
    
    
    
    (103
    )
    
    
    (10
    )Ceded premiums related to corporate
aggregate reinsurance treaties
    
    
    10
    
    
    
    29
    
    
    
    62
    
    
    
    101Pretax unfavorable (favorable) premium development
    
    
    86
    
    
    
    46
    
    
    
    (41
    )
    
    
    91Total 2002 unfavorable (favorable) net prior
year development (pretax)
    
    $
    (119
    )
    
    $
    60
    
    
    $
    114
    
    
    $
    55Total 2002 unfavorable (favorable) net prior year
development (after-tax)
    
    $
    (77
    )
    
    $
    39
    
    
    $
    74
    
    
    $
    36
 Strategic Review During 2003, CNA completed a strategic review of its operations and decided to concentrate efforts
on its property and casualty business. As a result of this review and several significant charges
in 2003, a capital plan was developed to replenish statutory capital of the property and casualty
subsidiaries. A summary of the capital plan, related actions and other significant business
decisions is discussed below: Sale of Individual Life Business On April 30, 2004, CNA sold its individual life insurance
business. The business sold included term, universal and permanent life insurance policies and
individual annuity products. CNAs individual long term care and structured settlement businesses
were excluded from the sale. Consideration from the sale was approximately $700 million. CNA
recorded a realized investment loss of $389 million after-tax ($622 million pretax) in 2004. See
Note P to the Consolidated Financial Statements in Item 8 for further information. Sale of Group Benefits Business On December 31, 2003, CNA sold the majority of its group benefits
business. The business sold included group life and accident, short and long term disability and
certain other products. CNAs group long term care and specialty medical businesses were excluded
from the sale. Consideration from the sale was approximately $530 million, resulting in realized
investment loss on the sale of $122 after-tax ($163 million pretax), including an after-tax
realized investment gain of $8 million ($13 million pretax) recorded in the second quarter of 2004. See Note P to the Consolidated
Financial Statements included under Item 8 for further information. Exit from Reinsurance Business During 2003, the Company sold the renewal rights for most of the
treaty business of CNA Re and withdrew from the assumed reinsurance business. CNA is managing the
run-off of its retained liabilities. Expense Initiatives During 2003, the Company undertook an expense initiative, of which the
primary components were a reduction of the workforce by approximately five percent, lower
commissions and other acquisition costs, principally related to workers compensation, and reduced
spending in other areas. The Company achieved the 20




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##### Table of Contents



targeted workforce reduction in 2003. Actions related to reducing commissions and other acquisition expenses began in 2003 and were completed in
2004. During 2004, the Company undertook additional expense initiatives that produced expense savings of
approximately $100 million. The primary components of the expense initiatives were a reduction in
certain business expenses through more stringent expense policies and guidelines, reduced
facilities cost through consolidation of locations and, to a lesser extent, workforce reductions.
The Company is currently formulating plans to reach its goal of an additional $100 million of
expense reductions in 2005. Capital Plan In November of 2003, the Company established a capital plan to replenish statutory
capital impacted by the strategic review and charges for prior year development and related
matters. Under the capital plan, in November of 2003, CNAF sold to Loews $750 million of a new
series of convertible preferred stock which converted into 32,327,015 shares of CNAF common stock
on April 20, 2004, and received commitments from Loews for additional capital support of up to $650
million through the purchase of surplus notes of Continental Casualty Company (CCC), CNAs
principal insurance subsidiary, in the event certain additions to CCCs statutory capital were not
achieved through asset sales. As a result of this commitment, Loews purchased $300 million
principal amount of surplus notes in February of 2004 in relation to CNAs sale of the individual
life business and $46 million principal amount of surplus notes in February of 2004 in relation to
the sale of the group benefits business. The $300 million surplus note was repaid in June of 2004,
and the $46 million surplus note was repaid in December of 2004, thereby fulfilling all of the
commitments under the capital plan. Revised Business Segment Reporting As a result of the strategic review and other actions
described above, in 2004 CNA changed how it manages its core operations and makes business
decisions. Accordingly, the Company revised its reportable business segment structure to reflect
these changes. CNAs core operations, property and casualty operations, are now reported in two
business segments: Standard Lines and Specialty Lines. CNAs non-core operations are managed in
two segments: Life and Group Non-Core and Corporate and Other Non-Core. Prior period segment
disclosures have been conformed to the current year presentation. Standard Lines includes standard property and casualty coverages, excess and surplus lines
and insurance and risk management products. CNA Global (formerly included in Specialty Lines),
which consists of marine and global standard lines, is also included in Standard Lines. Specialty Lines includes professional financial and specialty property and casualty
products and services. Life and Group Non-Core includes the results of Life Operations and Group Operations
(formerly separate reportable segments), which primarily have been sold or placed in run-off, and
certain run-off life and group operations formerly included in the Corporate and Other segment. Corporate and Other Non-Core includes the results of several property and casualty and
other lines of business placed in run-off, including CNA Re (formerly a stand alone property and
casualty segment) and CNA Guaranty and Credit (formerly included in Specialty Lines). This segment
also includes results related to the centralized adjusting and settlement of APMT claims,
participation in voluntary insurance pools and other non-insurance operations. 21




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##### Table of Contents



Results of Retained and Sold Businesses Throughout this MD&A, the results of operations include
discussion and results for all of CNAs businesses, including those sold or exited as described
above. The following tables provide information about CNAs historical results of operations for
the retained and sold businesses. Consolidated Net Income (Loss) Life and
    
    CorporateGroup Non-
    
    and OtherStandard Lines
    
    Specialty Lines
    
    Core
    
    Non-Core (b)
    
    TotalYear ended December 31, 2004Net results of businesses retained
    
    $
    360
    
    
    $
    378
    
    
    $
    13
    
    
    $
    117
    
    
    $
    868Net results of businesses sold (a)
    
    
    
    
    
    
    
    
    
    
    (427
    )
    
    
    
    
    
    
    (427
    )Total consolidated net income
(loss) for the year ended December 31, 2004
    
    $
    360
    
    
    $
    378
    
    
    $
    (414
    )
    
    $
    117
    
    
    $
    441Year ended December 31, 2003Net results of businesses retained
    
    $
    (717
    )
    
    $
    40
    
    
    $
    41
    
    
    $
    (761
    )
    
    $
    (1,397
    )Net results of businesses sold (a)
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    (36
    )Total consolidated net income
(loss) for the year ended
December 31, 2003
    
    $
    (717
    )
    
    $
    40
    
    
    $
    5
    
    
    $
    (761
    )
    
    $
    (1,433
    )Year ended December 31, 2002Net results of businesses retained
    
    $
    47
    
    
    $
    60
    
    
    $
    (42
    )
    
    $
    
    
    
    $
    65Net results of businesses sold (a)
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    90Total consolidated net income
(loss) for the year ended
December 31, 2002
    
    $
    47
    
    
    $
    60
    
    
    $
    48
    
    
    $
    
    
    
    $
    155
  (a)
    Includes the group benefits business sold on December 31, 2003, the individual life
business sold on April 30, 2004 and the CNA Trust business sold on August 1, 2004. The
gains or losses recognized on these sales are included in these net results.(b)
    Includes $52 million, $23 million and $136 million of net income for the years ended
December 31, 2004, 2003 and 2002 from CNA Re, which is in run-off. 22




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##### Table of Contents



Net Earned Premiums Life and
    
    CorporateGroup Non-
    
    and OtherStandard Lines
    
    Specialty Lines
    
    Core
    
    Non-Core (b)
    
    TotalYear ended December 31, 2004Net earned premiums of
businesses retained
    
    $
    4,917
    
    
    $
    2,277
    
    
    $
    806
    
    
    $
    94
    
    
    $
    8,094Net earned premiums of
businesses sold (a)
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    115Total net earned premiums
for the year ended December
31, 2004
    
    $
    4,917
    
    
    $
    2,277
    
    
    $
    921
    
    
    $
    94
    
    
    $
    8,209Year ended December 31, 2003Net earned premiums of
businesses retained
    
    $
    4,530
    
    
    $
    1,840
    
    
    $
    917
    
    
    $
    468
    
    
    $
    7,755Net earned premiums of
businesses sold (a)
    
    
    
    
    
    
    
    
    
    
    1,459
    
    
    
    
    
    
    
    1,459Total net earned premiums
for the year ended December
31, 2003
    
    $
    4,530
    
    
    $
    1,840
    
    
    $
    2,376
    
    
    $
    468
    
    
    $
    9,214Year ended December 31, 2002Net earned premiums of
businesses retained
    
    $
    4,678
    
    
    $
    1,451
    
    
    $
    2,027
    
    
    $
    676
    
    
    $
    8,832Net earned premiums of
businesses sold (a)
    
    
    
    
    
    
    
    
    
    
    1,381
    
    
    
    
    
    
    
    1,381Total net earned premiums
for the year ended December
31, 2002
    
    $
    4,678
    
    
    $
    1,451
    
    
    $
    3,408
    
    
    $
    676
    
    
    $
    10,213
  (a)
    Includes the group benefits business sold on December 31, 2003 and the individual
life business sold on April 30, 2004.(b)
    Includes $125 million, $536 million and $642 million of Net Earned Premiums for the years
ended December 31, 2004, 2003 and 2002 from CNA Re, which is in run-off. Reclassification of Change in Allowance for Uncollectible Reinsurance In 2004, the expenses
incurred related to uncollectible reinsurance receivables were reclassified from Other operating
expenses to Insurance claims and policyholders benefits on the Consolidated Statements of
Operations. Prior period amounts and ratios have been reclassified to conform to the current year
presentation. This reclassification had no impact on net income (loss) or the combined ratios in
any period; however, this change generally had an unfavorable impact on the loss and loss
adjustment expense ratios and a favorable impact on the expense ratios. 23




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##### Table of Contents



Critical Accounting Estimates The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the
amounts of revenues and expenses reported during the period. Actual results may differ from those
estimates. CNAs Consolidated Financial Statements and accompanying notes have been prepared in accordance
with GAAP applied on a consistent basis. CNA continually evaluates the accounting policies and
estimates used to prepare the Consolidated Financial Statements. In general, managements
estimates are based on historical experience, evaluation of current trends, information from third
party professionals and various other assumptions that are believed to be reasonable under the
known facts and circumstances. The accounting estimates discussed below are considered by management to be critical to an
understanding of CNAs Consolidated Financial Statements as their application places the most
significant demands on managements judgment. Note A of the Consolidated Financial Statements
included under Item 8 should be read in conjunction with this section to assist with obtaining an
understanding of the underlying accounting policies related to these estimates. Due to the
inherent uncertainties involved with this type of judgment, actual results could differ
significantly from estimates and may have a material adverse impact on the Companys results of
operations or equity. Insurance Reserves Insurance reserves are established for both short and long-duration insurance contracts.
Short-duration contracts are primarily related to property and casualty insurance policies where
the reserving process is based on actuarial estimates of the amount of loss, including amounts for
known and unknown claims. Long-duration contracts typically include long term care products and
are estimated using actuarial estimates about mortality and morbidity, as well as assumptions about
expected investment returns. Workers compensation lifetime claim reserves and accident and health
claim reserves are calculated using mortality and morbidity assumptions based on Company and
industry experience, and are discounted at interest rates that range from 3.5% to 6.5% at December
31, 2004 and 2003. The reserve for unearned premiums on property and casualty and accident and
health contracts represents the portion of premiums written related to the unexpired terms of
coverage. The inherent risks associated with the reserving process are discussed in the Reserves
 Estimates and Uncertainties section below. Reinsurance Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim
adjustment expense reserves or future policy benefits reserves and are reported as receivables in
the Consolidated Balance Sheets. The ceding of insurance does not discharge the primary liability
of the Company. An estimated allowance for doubtful accounts is recorded on the basis of periodic
evaluations of balances due from reinsurers, reinsurer solvency, managements experience and
current economic conditions. Further information on reinsurance is provided in the Reinsurance
section below. Valuation of Investments and Impairment of Securities Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due
to the level of risk associated with certain invested assets and the level of uncertainty related
to changes in the value of these assets, it is possible that changes in risks in the near term
could have an adverse material impact on the Companys results of operations or equity. The Companys investment portfolio is subject to market declines below book value that may be
other-than-temporary. The Company has an impairment committee, which reviews the investment
portfolio on a quarterly basis, with ongoing analysis as new information becomes available. Any
decline that is determined to be other-than-temporary is recorded as an impairment loss in the results of operations in the period in which the determination occurred. 24




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The Company continues to monitor potential changes in authoritative guidance related to recognizing
other-than-temporary impairments. Any such changes may cause the Company to recognize impairment
losses in results of operations which would not be recognized under the current guidance, or to
recognize such losses in earlier periods, especially those due to increases in interest rates.
Such changes could also impact the recognition of investment income on impaired securities. While
the impact of changes in authoritative guidance could increase earnings volatility in future
periods, because fluctuations in the fair value of securities are already reflected in
shareholders equity, any changes would not be expected to have a significant impact on equity.
Further information on the Companys process for evaluating impairments is provided in the
Investments section below. Long Term Care Products The Companys reserves and deferred acquisition costs for its long term care product offerings are
based on certain assumptions including morbidity, policy persistency and interest rates. Actual
experience may differ from these assumptions. The recoverability of deferred acquisition costs and
the adequacy of the reserves are contingent on actual experience related to these key assumptions
and other factors including potential future premium increases and future health care cost trends.
The results of operations and/or equity may be materially, adversely affected if actual experience
varies significantly from these assumptions. Pension and Postretirement Benefit Obligations The Company is required to make a significant number of assumptions in order to estimate the
liabilities and costs related to its pension and postretirement benefit obligations to employees
under its benefit plans. The assumptions that have the most impact on pension costs are the
discount rate, the expected return on plan assets and the rate of compensation increases. These
assumptions are evaluated relative to current market factors such as inflation, interest rates and
fiscal and monetary policies. Changes in these assumptions can have a material impact on pension
obligations and pension expense. Further information on the Companys pension and postretirement
benefit obligations is included in Note J of the Consolidated Financial Statements included under
Item 8. Legal Proceedings The Company is involved in various legal proceedings that have arisen during the ordinary course of
business. The Company evaluates the facts and circumstances of each situation, and when the
Company determines it necessary, a liability is estimated and recorded. Further information on the
Companys legal proceedings and related contingent liabilities is provided in Note F and G of the
Consolidated Financial Statements included under Item 8. Loans to National Contractor CNA Surety has provided significant surety bond protection for a large national contractor that
undertakes projects for the construction of government and private facilities, a substantial
portion of which have been reinsured by CCC. In order to help this contractor meet its liquidity
needs and complete projects which had been bonded by CNA Surety, commencing in 2003 CNAF has
provided loans to the contractor through a credit facility. In December of 2004, the credit
facility was amended to increase the maximum available loans to $106 million from $86 million. The
amendment also provides that CNAF may in its sole discretion further increase the amounts available
for loans under the credit facility, up to an aggregate maximum of $126 million. As of December
31, 2004 and 2003, there were $99 million and $80 million of total debt outstanding under the credit facility.
Additional loans in January and February of 2005 brought the total debt outstanding under the credit facility, less accrued interest, to
$104 million as of February 24, 2005. Loews, through a participation agreement with CNAF, provided
funds for and owned a participation of $29 million and $25 million of the loans outstanding as of
December 31, 2004 and 2003, and has agreed to participation of one-third of any additional loans
which may be made above the original $86 million credit facility limit up to the $126 million
maximum available line. 25




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In connection with the amendment to increase the maximum available line under the credit facility
in December of 2004, the term of the loan under the credit facility was extended to mature in March
of 2009 and the interest rate was reduced prospectively from 6% over prime rate to 5% per annum,
effective as of December 27, 2004, with an additional 3% interest accrual when borrowings under the
facility are at or below the original $86 million limit. Loans under the credit facility are
secured by a pledge of substantially all of the assets of the contractor and certain of its
affiliates. In connection with the credit facility, CNAF has also guaranteed or provided
collateral for letters of credit which are charged against the maximum available line and, if drawn
upon, would be treated as loans under the credit facility. As of December 31, 2004 and 2003, these
guarantees and collateral obligations aggregated $13 million and $7 million. As of December 31, 2004, the aggregate amount of outstanding principal and accrued interest under
the credit facility was $70 million, net of participation by Loews in the amount of $29 million. The contractor implemented a restructuring plan intended to reduce costs and improve cash flow, and
appointed a chief restructuring officer to manage execution of the plan. In the course of
addressing various expense, operational and strategic issues, however, the contractor has decided
to substantially reduce the scope of its original business and to concentrate on those segments
determined to be potentially profitable. As a consequence, operating cash flow, and in turn the
capacity to service debt, has been reduced below previous levels. Restructuring plans have also
been extended to accommodate these circumstances. In light of these developments, CNA has taken an
impairment charge of $56 million pretax ($36 million after-tax) for the fourth quarter of 2004, net
of the participation by Loews, with respect to amounts loaned under the facility. Any draws under
the credit facility beyond $106 million or further changes in the national contractors business
plan or projections may necessitate further impairment charges. Indemnification and subrogation
rights, including rights to contract proceeds on construction projects in the event of default,
exist that reduce CNA Suretys and ultimately the Companys exposure to loss. While CNAF believes
that the contractors restructuring efforts may be successful and provide sufficient cash flow for
its operations, the contractors failure to achieve its restructuring plan or perform its
contractual obligations under the credit facility or under the Companys surety bonds could have a
material adverse effect on the Companys results of operations and/or equity. If such failures
occur, the Company estimates the surety loss, net of indemnification and subrogation recoveries,
but before the effects of minority interest, to be approximately $200 million pretax. In addition,
such failures could cause the remaining unimpaired amount due under the credit facility to be
uncollectible. Further information on the Companys exposure to this national contractor and this credit agreement
are provided in Note S of the Consolidated Financial Statements included under Item 8 and the
Liquidity and Capital Resources section below. Reserves  Estimates and Uncertainties The Company maintains reserves to cover its estimated ultimate unpaid liability for claim and claim
adjustment expenses, including the estimated cost of the claims
adjudication process, for claims that have been reported but not yet
settled (case reserves) and
claims that have been incurred but not reported (IBNR). Claim and claim adjustment expense reserves are reflected as liabilities and are
included on the Consolidated Balance Sheets
under the heading Insurance Reserves. Adjustments to prior year reserve estimates, if necessary,
are reflected in the results of operations in the period that the need for such adjustments is
determined. The carried case and IBNR reserves are provided in the Segment Results section of this
MD&A and in Note F of the Consolidated Financial Statements included under Item 8. The level of reserves maintained by the Company represents managements best estimate, as
of a particular point in time, of what the ultimate settlement and administration of claims will
cost based on its assessment of facts and circumstances known at that time. Reserves are
not an exact calculation of liability but instead are complex estimates that are derived by the
Company, generally utilizing a variety of actuarial reserve estimation techniques, from numerous
assumptions and expectations about future events, both internal and external, many of which are
highly uncertain. 26




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Among the many uncertain future events about which the Company makes assumptions and estimates,
many of which have become increasingly unpredictable, are claims severity, frequency of claims,
mortality, morbidity, expected interest rates, inflation, claims handling and case reserving
policies and procedures, underwriting and pricing policies, changes in the legal and regulatory
environment and the lag time between the occurrence of an insured event and the time it is
ultimately settled, referred to in the insurance industry as the tail. These factors must be
individually considered in relation to the Companys evaluation of each type of business. Many of
these uncertainties are not precisely quantifiable, particularly on a prospective basis, and
require significant management judgment. Given the factors described above, it is not possible to quantify precisely the ultimate exposure
represented by claims and related litigation. As a result, the Company regularly reviews the
adequacy of its reserves and reassesses its reserve estimates as historical loss experience
develops, additional claims are reported and settled and additional information becomes available
in subsequent periods. In addition, the Company is subject to the uncertain effects of emerging or potential claims and
coverage issues that arise as industry practices and legal, judicial, social and other
environmental conditions change. These issues have had, and may continue to have, a negative
effect on the Companys business by either extending coverage beyond the original underwriting
intent or by increasing the number or size of claims. Recent examples of emerging or potential
claims and coverage issues include:  
    increases in the number and size of water damage claims, including those related to
expenses for testing and remediation of mold conditions;
    increases in the number and size of claims relating to injuries from medical products,
and exposure to lead;
    the effects of accounting and financial reporting scandals and other major corporate
governance failures, which have resulted in an increase in the number and size of claims,
including director and officer and errors and omissions insurance claims;
    class action litigation relating to claims handling and other practices;
    increases in the number of construction defect claims, including claims for a broad
range of additional insured endorsements on policies; and
    increases in the number of claims alleging abuse by members of the clergy. The impact of these and other unforeseen emerging or potential claims and coverage issues is
difficult to predict and could materially adversely affect the adequacy of the Companys claim and
claim adjustment expense reserves and could lead to future reserve additions. See the Segment
Results sections of this MD&A for a discussion of changes in reserve estimates and the impact on
the Companys results of operations. The Companys experience has been that establishing reserves for casualty coverages relating to
APMT claim and claim adjustment expenses is subject to uncertainties that are greater than those
presented by other claims. Estimating the ultimate cost of both reported and unreported APMT
claims is subject to a higher degree of variability due to a number of additional factors,
including among others:  
    coverage issues, including whether certain costs are covered under the policies and
whether policy limits apply;
    inconsistent court decisions and developing legal theories;
    increasingly aggressive tactics of plaintiffs lawyers;
    the risks and lack of predictability inherent in major litigation; 27




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
    changes in the volume of asbestos and environmental pollution and mass tort claims
which cannot now be anticipated;
    continued increase in mass tort claims relating to silica and silica-containing
products;
    the impact of the exhaustion of primary limits and the resulting increase in claims on
any umbrella or excess policies the Company has issued;
    the number and outcome of direct actions against the Company; and
    the Companys ability to recover reinsurance for asbestos and environmental pollution
and mass tort claims. It is also not possible to predict changes in the legal and legislative environment and the impact
on the future development of APMT claims. This development will be affected by future court
decisions and interpretations, as well as changes in applicable legislation. It is difficult to
predict the ultimate outcome of large coverage disputes until settlement negotiations near
completion and significant legal questions are resolved or, failing settlement, until the dispute
is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations
often involve a large number of claimants and other parties and require court approval to be
effective. A further uncertainty exists as to whether a national privately financed trust to
replace litigation of asbestos claims with payments to claimants from the trust will be established
and approved through federal legislation, and, if established and approved, whether it will contain
funding requirements in excess of the Companys carried loss reserves. Due to the factors described above, among others, establishing reserves for APMT claim and claim
adjustment expenses is subject to uncertainties that are greater than those presented by other
claims. Traditional actuarial methods and techniques employed to estimate the ultimate cost of
claims for more traditional property and casualty exposures are less precise in estimating claim
and claim adjustment reserves for APMT, particularly in an environment of emerging or potential
claims and coverage issues that arise from industry practices and legal, judicial and social
conditions. Therefore, these traditional actuarial methods and techniques are necessarily
supplemented with additional estimation techniques and methodologies, many of which involve
significant judgments that are required of management. Due to the inherent uncertainties in
estimating reserves for APMT claim and claim adjustment expenses and the degree of variability due
to, among other things, the factors described above, the Company may be required to record material
changes in its claim and claim adjustment expense reserves in the future, should new information
become available or other developments emerge. See the Asbestos and Environmental Pollution and
Mass Tort Reserves section of this MD&A for additional information relating to APMT claims and
reserves. The Companys recorded reserves, including APMT reserves, reflect managements best
estimate as of a particular point in time based upon known facts, current law and managements
judgment. The reserve analyses performed by the Companys actuaries result in point estimates.
Management uses these point estimates as the primary factor in determining the carried reserve.
The carried reserve may differ from the actuarial point estimate as the result of managements
consideration of the factors noted above including, but not limited to, the potential volatility of
the projections associated with the specific product being analyzed and the effects of changes in
claims handling, underwriting and other factors impacting claims costs that may not be quantifiable
through actuarial analysis. For APMT reserves, the reserve
analysis performed by the Companys actuaries results in both a point estimate and a range.
Management uses the point estimate as the primary factor in determining the carried reserve but
also considers the range given the volatility of APMT exposures, as noted above. For Standard Lines, the December 31, 2004 carried net claim and claim adjustment expense reserve is
slightly higher than the actuarial point estimate. For Specialty Lines, the December 31, 2004
carried net claim and claim adjustment expense reserve is also slightly higher than the actuarial
point estimate. For both Standard Lines and Specialty Lines, the difference is primarily due to
the 2004 accident year. The data from the current accident year is very immature from a claim and
claim adjustment expense point of view so it is prudent to wait until experience confirms that the
loss ratios should be adjusted. For Corporate and Other Non-Core, the December 31, 2004 carried
net claim and claim adjustment expense reserve is slightly higher than the actuarial point
estimate. While the 28




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##### Table of Contents



actuarial estimates for APMT exposures reflect current knowledge, management
feels it is prudent, based on the history of developments in this area, to reflect some volatility
in the carried reserve until the ultimate outcome of the issues associated with these exposures is
clearer. In light of the many uncertainties associated with establishing the estimates and making the
assumptions necessary to establish reserve levels, the Company reviews its reserve estimates on a
regular basis and makes adjustments in the period that the need for such adjustments is determined
(see discussion on net prior year development above). These reviews have resulted in the Company
identifying information and trends that have caused the Company to increase its reserves in prior
periods and could lead to the identification of a need for additional material increases in claim
and claim adjustment expense reserves, which could materially adversely affect the Companys
results of operations, equity, business and insurer financial strength and debt ratings (see the
Ratings section of this MD&A). The following table presents estimated volatility in carried claim and claim adjustment expense
reserves for the Standard Lines, Specialty Lines and Corporate and Other Non-Core segments. In
addition to the gross carried loss reserves presented below, Claim and Claim Adjustment Expense
Reserves as reflected on the Consolidated Balance Sheet include $3,680 million at December 31,
2004, related to the Life and Group Non-Core segment. Estimated Volatility in Gross Carried Loss Reserves by Segment GrossCarried
    
    EstimatedLoss
    
    Volatility inDecember 31, 2004
    
    Reserves
    
    Reserves(In millions)Standard Lines
    
    $
    14,302
    
    
    
    +/- 7
    %Specialty Lines
    
    
    4,860
    
    
    
    +/- 7
    %Corporate and Other Non-Core
    
    
    8,678
    
    
    
    +/- 25
    %
 The estimated volatility noted above does not represent an actuarial range around the
Companys gross loss reserves, and it does not represent the range of all possible outcomes. The
volatility represents an estimate of the inherent volatility associated with estimating loss
reserves for the specific type of business written by
each segment, and along with the associated reserve balances, allows for the quantification of
potential earnings impacts in future reporting periods. The primary characteristics influencing
the estimated level of volatility are the length of the claim settlement period, the potential for
changes in medical and other claim costs, changes in the level of litigation or other dispute
resolution processes, changes in the legal environment and the potential for different types of
injuries emerging. Ceded reinsurance arrangements may reduce the volatility. Since ceded
reinsurance arrangements vary by year, volatility in gross reserves may not result in comparable
impacts to net income or shareholders equity. Reinsurance CNA assumes and cedes reinsurance to other insurers, reinsurers and members of various reinsurance
pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide
greater diversification of risk, minimize exposures on larger risks and to exit certain lines of
business. The ceding of insurance does not discharge the primary liability of the Company.
Therefore, a credit exposure exists with respect to property and casualty and life reinsurance
ceded to the extent that any reinsurer is unable to meet the obligations or to the extent that the
reinsurer disputes the liabilities assumed under reinsurance agreements. Property and casualty reinsurance coverages are tailored to the specific risk characteristics of
each product line and CNAs retained amount varies by type of coverage. Treaty reinsurance is
purchased to protect specific lines of business such as property, workers compensation and
professional liability. Corporate catastrophe reinsurance is also purchased for property and
workers compensation exposure. Most treaty reinsurance is purchased on an excess of loss basis.
CNA also utilizes facultative reinsurance in certain lines. 29




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##### Table of Contents



The Companys overall reinsurance program includes certain property and casualty contracts, such as
the corporate aggregate reinsurance treaties discussed in more detail later in this section, that
are entered into and accounted for on a funds withheld basis. Under the funds withheld basis,
the Company records the cash remitted to the reinsurer for the reinsurers margin, or cost of the
reinsurance contract, as ceded premiums. The remainder of the premiums ceded under the reinsurance
contract not remitted in cash is recorded as funds withheld liabilities. The Company is required
to increase the funds withheld balance at stated interest crediting rates applied to the funds
withheld balance or as otherwise specified under the terms of the contract. The funds withheld
liability is reduced by any cumulative claim payments made by the Company in excess of the
Companys retention under the reinsurance contract. If the funds withheld liability is exhausted,
interest crediting will cease and additional claim payments are recoverable from the reinsurer.
The funds withheld liability is recorded in reinsurance balances payable in the Consolidated
Balance Sheets. Interest cost on funds withheld and other deposits is credited during all periods in which a funds
withheld liability exists. Pretax interest cost, which is included in net investment income, was
$267 million, $344 million and $239 million in 2004, 2003 and 2002. The amount subject to interest
crediting rates on such contracts was $2,570 million and $2,789 million at December 31, 2004 and
2003. Certain funds withheld reinsurance contracts, including the corporate aggregate reinsurance
treaties, require interest on additional premiums arising from ceded losses as if those premiums
were payable at the inception of the contract. Additionally, on the corporate aggregate
reinsurance treaties discussed below, if the Company exceeds certain aggregate loss ratio
thresholds, the rate at which interest charges are accrued would increase and be retroactively
applied to the inception of the contract or to a specified date. Any such retroactive interest is
accrued in the period the additional premiums arise or the loss ratio thresholds are met. The
amount of retroactive interest, included in the totals above, was $46 million, $147 million and $10
million in 2004, 2003 and 2002. The amount subject to interest crediting on these funds withheld contracts will vary over time
based on a number of factors, including the timing of loss payments and ultimate gross losses
incurred. The Company expects that it will continue to incur significant interest costs on these
contracts for several years. The following table summarizes the amounts receivable from reinsurers at December 31, 2004 and
December 31, 2003. Components of reinsurance receivables December 31, 2004
    
    December 31, 2003(In millions)Reinsurance receivables related to insurance reserves:Ceded claim and claim adjustment expense
    
    $
    13,984
    
    
    $
    14,216Ceded future policy benefits
    
    
    1,260
    
    
    
    1,218Ceded policyholders funds
    
    
    65
    
    
    
    7Billed reinsurance receivables
    
    
    685
    
    
    
    813Reinsurance receivables
    
    
    15,994
    
    
    
    16,254Allowance for uncollectible reinsurance
    
    
    (531
    )
    
    
    (573
    )Reinsurance receivables, net of allowance for
uncollectible reinsurance
    
    $
    15,463
    
    
    $
    15,681
 The Company has established an allowance for uncollectible reinsurance receivables. The
allowance for uncollectible reinsurance receivables was $531 million and $573 million at December
31, 2004 and December 31, 2003. The net decrease in the allowance was primarily due to a release
of a previously established allowance related to The Trenwick Group resulting from the execution of
commutation agreements in 2004, partially offset by a net increase in the allowance for other
reinsurance receivables. The provision incurred related to uncollectible reinsurance receivables
is presented as a component of Insurance claims and policyholders benefits on the Consolidated
Statements of Operations. Prior to the April of 2004 sale of its individual life and annuity business to Swiss Re Life &
Health America Inc. (Swiss Re), CNA had reinsured a portion of this business through coinsurance,
yearly renewable term and facultative programs to various reinsurers. As a result of the sale of
the individual life and annuity business, 100% of the net reserves were reinsured to Swiss Re.
Subject to certain exceptions, Swiss Re assumed the credit risk of 30




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the business that was previously reinsured to other carriers. As of December 31, 2004, CNA ceded $1,012 million of future policy
benefits to Swiss Re. In connection with the sale of the group benefits business, CNA ceded
insurance reserves to Hartford Financial Services, Inc. (Hartford). As of December 31, 2004 and
2003, these ceded reserves were $1,726 million and $1,473 million. The Company attempts to mitigate its credit risk related to reinsurance by entering into
reinsurance arrangements only with reinsurers that have credit ratings above certain levels and by
obtaining substantial amounts of collateral. The primary methods of obtaining collateral are
through reinsurance trusts, letters of credit and funds withheld balances. Such collateral was
approximately $4,561 million and $5,255 million at December 31, 2004 and 2003. In certain circumstances, including significant deterioration of a reinsurers financial strength
ratings, the Company may engage in commutation discussions with individual reinsurers. The outcome
of such discussions may result in a lump sum settlement that is less than the recorded receivable,
net of any applicable allowance for doubtful accounts. Losses arising from commutations could have an adverse
material impact on the Companys results of operations or equity. In 2003, the Company commuted all remaining ceded and assumed reinsurance contracts with four
Gerling entities. The commutations resulted in a pretax loss of $109 million, which was net of a
previously established allowance for doubtful accounts of $47 million. The Company has no further
exposure to the Gerling companies that are in run-off. CNAs largest recoverables from a single reinsurer at December 31, 2004, including prepaid
reinsurance premiums, were approximately $2,236 million from subsidiaries of The Allstate
Corporation (Allstate), $2,163 million from subsidiaries of
Swiss Reinsurance Group, $1,843 million
from subsidiaries of Hannover Reinsurance (Ireland), Ltd., $1,726 million from Hartford Life Group
Insurance Company, $944 million from American Reinsurance Company and $603 million from
subsidiaries of the Berkshire Hathaway Group. In 2002, the Company entered into a corporate aggregate reinsurance treaty covering substantially
all of the Companys property and casualty lines of business (the 2002 Cover). Ceded premium
related to the reinsurers margin of $10 million was recorded in 2002. No losses were ceded during
2002 under this contract, and the 2002 Cover was commuted as of December 31, 2002. The Company has an aggregate reinsurance treaty related to the 1999 through 2001 accident years
that covers substantially all of the Companys property and casualty lines of business (the
Aggregate Cover). The Aggregate Cover provides for two sections of coverage. These coverages
attach at defined loss ratios for each accident year. Coverage under the first section of the
Aggregate Cover, which is available for all accident years covered by the treaty, has a $500
million limit per accident year of ceded losses and an aggregate limit of $1 billion of ceded
losses for the three accident years. The ceded premiums associated with the first section are a
percentage of ceded losses and for each $500 million of limit the ceded premium is $230 million.
The second section of the Aggregate Cover, which only relates to accident year 2001, provides
additional coverage of up to $510 million of ceded losses for a maximum ceded premium of $310
million. Under the Aggregate Cover, interest charges on the funds withheld liability accrue at 8%
per annum. The aggregate loss ratio for the three-year period has exceeded certain thresholds
which requires additional premiums to be paid and an increase in the rate at which interest charges
are accrued. This rate will increase to 8.25% per annum commencing in 2006. Also, if an
additional aggregate loss ratio threshold is exceeded, additional premiums of 10% of amounts in
excess of the aggregate loss ratio threshold are to be paid retroactively with interest. Any such
premiums would be recorded in the period in which the loss ratio threshold is met. During 2003, as a result of the unfavorable net prior year development recorded related to accident
years 2000 and 2001, the $500 million limit related to the 2000 and 2001 accident years under the
first section was fully utilized and losses of $500 million were ceded under the first section of
the Aggregate Cover. In 2001, as a result of reserve additions including those related to accident
year 1999, the $500 million limit related to the 1999 accident year under the first section was
fully utilized and losses of $510 million were ceded under the second section as a result of losses
related to the WTC event. The aggregate limits for the Aggregate Cover have been fully utilized. 31




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The impact of the Aggregate Cover was as follows: Impact of Aggregate Cover Year ended December 31
    
    2004
    
    2003
    
    2002(In millions)Ceded earned premium
    
    $
    (1
    )
    
    $
    (258
    )
    
    $
    Ceded claim and claim adjustment expenses
    
    
    
    
    
    
    500
    
    
    
    Interest charges
    
    
    (82
    )
    
    
    (147
    )
    
    
    (51
    )Pretax (expense) benefit
    
    $
    (83
    )
    
    $
    95
    
    
    $
    (51
    )
 In 2001, the Company entered into a one-year aggregate reinsurance treaty related to the 2001
accident year covering substantially all property and casualty lines of business in the Continental
Casualty Company pool (the CCC Cover). The loss protection provided by the CCC Cover has an
aggregate limit of approximately $761 million of ceded losses. The ceded premiums are a percentage
of ceded losses. The ceded premium related to full utilization of the $761 million of limit is
$456 million. The CCC Cover provides continuous coverage in excess of the second section of the
Aggregate Cover discussed above. During 2003, the CCC Cover was fully utilized. Under the CCC
Cover, interest charges on the funds withheld generally accrue at 8% per annum. The interest rate
increases to 10% per annum if the aggregate loss ratio exceeds certain thresholds. In 2004, the
aggregate loss ratio exceeded this threshold which required the interest rate to increase
retroactively to the beginning of the contract, generating retroactive interest charges of $46
million which were recorded in 2004. At the Companys discretion, the contract can be commuted annually on the anniversary date of the
contract. The CCC Cover requires mandatory commutation on December 31, 2010, if the agreement has
not been commuted on or before such date. Upon mandatory commutation of the CCC
Cover, the reinsurer is required to release to the Company the
existing balance of the funds withheld account if the unpaid ultimate
ceded losses at the time of commutation are less than or equal to the
funds withheld account balance. If the unpaid ultimate
ceded losses at the time of commutation are greater than the funds withheld account balance, the
reinsurer will release the existing balance of the funds withheld account and pay CNA the present
value of the projected amount the reinsurer would have had to pay from its own funds absent a
commutation. The present value is calculated using 1-year LIBOR as of the date of the commutation. The impact of the CCC Cover was as follows: Impact of CCC Cover Year ended December 31
    
    2004
    
    2003
    
    2002(In millions)Ceded earned premium
    
    $
    
    
    
    $
    (100
    )
    
    $
    (101
    )Ceded claim and claim adjustment expenses
    
    
    
    
    
    
    143
    
    
    
    148Interest charges
    
    
    (91
    )
    
    
    (59
    )
    
    
    (37
    )Pretax (expense) benefit
    
    $
    (91
    )
    
    $
    (16
    )
    
    $
    10
 The impact by segment of the Aggregate Cover and the CCC Cover was as follows: Impact of Aggregate Cover and CCC Cover Year ended December 31
    
    2004
    
    2003
    
    2002(In millions)Standard Lines
    
    $
    (114
    )
    
    $
    70
    
    
    $
    (53
    )Specialty Lines
    
    
    (1
    )
    
    
    9
    
    
    
    3Corporate and Other Non-Core
    
    
    (59
    )
    
    
    
    
    
    
    9Pretax (expense) benefit
    
    $
    (174
    )
    
    $
    79
    
    
    $
    (41
    )
 32




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##### Table of Contents



Terrorism Insurance CNA and the insurance industry incurred substantial losses related to the 2001 World Trade Center
event. For the most part, the industry was able to absorb the loss of capital from these losses,
but the capacity to withstand the effect of any additional terrorism events was significantly
diminished. The Terrorism Risk Insurance Act of 2002 (the Act) established a program within the Department of
the Treasury under which the federal government will share the risk of loss by commercial property
and casualty insurers arising from future terrorist attacks. The Act expires on December 31, 2005.
Each participating insurance company must pay a deductible, ranging from 7% of direct earned
premiums from commercial insurance lines in 2003 to 15% in 2005, before federal government
assistance becomes available. For losses in excess of a companys deductible, the federal
government will cover 90% of the excess losses, while companies retain the remaining 10%. Losses
covered by the program will be capped annually at $100 billion; above this amount, insurers are not
liable for covered losses and Congress is to determine the procedures for and the source of any
payments. Amounts paid by the federal government under the program over certain phased limits are
to be recouped by the Department of the Treasury through policy surcharges, which cannot exceed 3%
of annual premium. The Company is required to participate in the program, but it does not cover life or health
insurance products. State law limitations applying to premiums and policies for terrorism coverage
are not generally affected under the program. The Act requires insurers to offer terrorism
coverage through 2004. On June 18, 2004, the Department of the Treasury announced its decision to
extend this offer requirement until December 31, 2005. While the Act provides the property and casualty industry with an increased ability to withstand
the effect of a terrorist event through 2005, given the unpredictability of the nature, targets,
severity or frequency of potential terrorist events, the Companys results of operations or equity
could nevertheless be materially adversely impacted by them. The Company is attempting to mitigate
this exposure through its underwriting practices, policy terms and conditions (where applicable).
In addition, under state laws, the Company is generally prohibited from excluding terrorism
exposure from its primary workers compensation. In those states that mandate property insurance
coverage of damage from fire following a loss, the Company is also prohibited from excluding
terrorism exposure under such coverage. Terrorism-related reinsurance losses are not covered by the Act. The Companys assumed reinsurance
arrangements either exclude terrorism coverage or significantly limit the level of coverage. The bills described above would extend the Act for two additional years and require that terrorism
coverage be made available for all years. Deductibles under the bills would be held at 15% in 2006
and raised to 20% in 2007. Notwithstanding these developments, enactment of a law extending the
Act is not assured. If the Act is not extended CNA will, among other steps, seek to exclude risks with perceived
terrorism exposure, to the extent permitted by law. Strict underwriting standards and risk
avoidance measures will be taken where exclusions are not permitted. Annual policy renewals with
effective dates of January 1, 2005 or later will be underwritten with the assumption that the Act
will not be extended and that no Federal backstop for terrorism exposure will be available. In
July 2004, the National Association of Insurance Commissioners adopted a Model Bulletin available
for use in states that intend to approve terrorism coverage limitations in the event the Act is not
reauthorized. Since that time, a number of states have announced that they will approve, on an
expedited basis, conditional exclusions which fall within certain limitations. Other states appear
unlikely to approve terrorism exclusions. There is no assurance that CNA will be able to eliminate
or limit terrorism exposure risks in coverages, or that regulatory authorities will approve policy
exclusions for terrorism. Restructuring In 2001, the Company finalized and approved two separate restructuring plans. The first plan
related to the Companys Information Technology operations. The remaining accrual of $3 million
was released during 2004. The second plan related to restructuring the property and casualty
segments and Life and Group Non-Core segment, discontinuation of the variable life and annuity
business and consolidation of real estate locations (the 2001 Plan). 33




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##### Table of Contents



2001 Plan The overall goal of the 2001 Plan was to create a simplified and leaner organization for customers
and business partners. The major components of the plan included a reduction in the number of
strategic business units (SBUs) in the property and casualty operations, changes in the strategic
focus of the Life and Group Non-Core segment (formerly Life Operations and Group Operations) and
consolidation of real estate locations. The reduction in the number of property and casualty SBUs
resulted in consolidation of SBU functions, including underwriting, claims, marketing and finance.
The strategic changes in Group Operations included a decision to discontinue the variable life and
annuity business. During 2002, $32 million pretax, or $21 million after-tax, of this accrual was reduced. No
restructuring or other related charges or releases related to the 2001 Plan were incurred in 2003
or 2004. All lease termination costs and impaired asset charges, except lease termination costs incurred by
operations in the United Kingdom and software write-offs incurred by Life and Group Non-Core
segment, were charged to the Corporate and Other Non-Core segment because office closure and
consolidation decisions were not within the control of the other segments affected. Lease
termination costs incurred in the United Kingdom related solely to the operations of CNA Re. All
other charges were recorded in the segment benefiting from the services or existence of an employee
or an asset. The following tables summarize the 2001 Plan Initial Accrual and the activity in that accrual
through December 31, 2004 by type of restructuring cost and by segment. 2001 Plan Initial Accrual EmployeeTermination
    
    Lease
    
    Impairedand Related
    
    Termination
    
    Asset
    
    OtherBenefit Costs
    
    Costs
    
    Charges
    
    Costs
    
    Total(In millions)2001 Plan Initial Accrual
    
    $
    68
    
    
    $
    56
    
    
    $
    30
    
    
    $
    35
    
    
    $
    189Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (35
    )Payments charged against liability
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Accrued costs December 31, 2001
    
    
    66
    
    
    
    56
    
    
    
    30
    
    
    
    
    
    
    
    152Costs that did not require cash
    
    
    (1
    )
    
    
    (3
    )
    
    
    (9
    )
    
    
    
    
    
    
    (13
    )Payments charged against liability
    
    
    (53
    )
    
    
    (12
    )
    
    
    (4
    )
    
    
    
    
    
    
    (69
    )Reduction of accrual
    
    
    (10
    )
    
    
    (7
    )
    
    
    (15
    )
    
    
    
    
    
    
    (32
    )Accrued costs December 31, 2002
    
    
    2
    
    
    
    34
    
    
    
    2
    
    
    
    
    
    
    
    38Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Payments charged against liability
    
    
    (2
    )
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )Accrued costs December 31, 2003
    
    
    
    
    
    
    19
    
    
    
    1
    
    
    
    
    
    
    
    20Payments charged against liability
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )Accrued costs December 31, 2004
    
    $
    
    
    
    $
    14
    
    
    $
    1
    
    
    $
    
    
    
    $
    15
 34




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##### Table of Contents



2001 Plan Initial Accrual CorporateStandard
    
    Specialty
    
    Life and Group
    
    and OtherLines
    
    Lines
    
    Non-Core
    
    Non-Core
    
    Total(In millions)2001 Plan Initial Accrual
    
    $
    42
    
    
    $
    4
    
    
    $
    54
    
    
    $
    89
    
    
    $
    189Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    (35
    )Payments charged against liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Accrued costs December 31, 2001
    
    
    42
    
    
    
    4
    
    
    
    19
    
    
    
    87
    
    
    
    152Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )Payments charged against liability
    
    
    (34
    )
    
    
    (1
    )
    
    
    (18
    )
    
    
    (16
    )
    
    
    (69
    )Reduction of accrual
    
    
    (7
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    (22
    )
    
    
    (32
    )Accrued costs December 31, 2002
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    36
    
    
    
    38Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Payments charged against liability
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    (15
    )
    
    
    (17
    )Accrued costs December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    20Payments charged against liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Accrued costs December 31, 2004
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    15
    
    
    $
    15
 Approximately $3 million of the remaining accrual for the 2001 Plan, primarily related to
lease termination costs, is expected to be paid in 2005. Segment Results The following is a discussion of the results of operations for the Companys operating segments.
In evaluating the results of the Standard Lines and Specialty Lines, management utilizes the
combined ratio, the loss ratio, the expense ratio, and the dividend ratio. These ratios are
calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim
and claim adjustment expenses to net earned premiums. The expense ratio is the percentage of
underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to
net earned premiums. The dividend ratio is the ratio of dividends incurred to net earned premiums.
The combined ratio is the sum of the loss, expense and dividend ratios. STANDARD LINES Business Overview Standard Lines works with an independent agency distribution system and network of brokers to
market a broad range of property and casualty insurance products and services to small,
middle-market and large businesses. The Standard Lines operating model focuses on underwriting
performance, relationships with selected distribution sources and understanding customer needs. Standard Lines includes Property, Casualty and CNA Global. Propertyprovides standard and excess property coverage, as well as boiler and machinery to a wide
range of businesses. Casualtyprovides standard casualty insurance products such as workers compensation, general and
product liability and commercial auto coverage through traditional products to a wide range of
businesses. The majority of Casualty customers are small and middle-market businesses, with less
than $1 million in annual insurance premiums. Most insurance programs are provided on a guaranteed
cost basis; however, Casualty has the capability to offer specialized, loss-sensitive insurance
programs to those customers viewed as higher risk and less predictable in exposure. 35




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##### Table of Contents



Excess & Surplus (E&S) is included in Casualty. E&S provides specialized insurance and other
financial products for selected commercial risks on both an individual customer and program basis.
Customers insured by E&S are generally viewed as higher risk and less predictable in exposure than
those covered by standard insurance markets. E&Ss products are distributed throughout the United
States through specialist producers, program agents and P&Cs agents and brokers. E&S has
specialized underwriting and claim resources in Chicago, Denver and Columbus. Property and Casualtys(P&C) field structure consists of 33 branch locations across the country
organized into 4 regions. Each branch provides the marketing, underwriting and risk control
expertise on the entire portfolio of products. The Centralized Processing Operation for small and
middle-market customers, located in Maitland, Florida, handles policy processing and accounting,
and also acts as a call center to optimize customer service. The claims field structure consists
of 26 locations organized into two zones, East and West. Also, Standard Lines, primarily through a
wholly owned subsidiary, ClaimsPlus, Inc., a third party administrator, began providing total risk
management services relating to claim services, risk control, cost management and information
services to the large commercial insurance marketplace in 2003. CNA Globalconsists of Marine and Global Standard Lines. Marine serves domestic and global ocean marine needs, with markets extending across North America,
Europe and throughout the world. Marine offers hull, cargo, primary and excess marine liability,
marine claims and recovery products and services. Business is sold through national brokers,
regional marine specialty brokers and independent agencies. Global Standard Lines is responsible for coordinating and managing the direct business of CNAs
overseas property and casualty operations. This business identifies and capitalizes on strategic
indigenous opportunities and currently has operations in Hawaii, Europe, Latin America and Canada. The following table details results of operations for Standard Lines. Results of Operations Years ended December 31
    
    2004
    
    2003
    
    2002(In millions)Net written premiums
    
    $
    4,582
    
    
    $
    4,561
    
    
    $
    4,755Net earned premiums
    
    
    4,917
    
    
    
    4,530
    
    
    
    4,678Income (loss) before net realized investment gains (losses)
    
    
    221
    
    
    
    (951
    )
    
    
    169Net realized investment gains (losses)
    
    
    139
    
    
    
    234
    
    
    
    (79
    )Net income (loss)
    
    
    360
    
    
    
    (717
    )
    
    
    47RatiosLoss and loss adjustment expense
    
    
    70.7
    %
    
    
    98.1
    %
    
    
    73.1
    %Expense
    
    
    34.6
    
    
    
    42.7
    
    
    
    31.5Dividend
    
    
    0.2
    
    
    
    2.2
    
    
    
    1.6Combined
    
    
    105.5
    %
    
    
    143.0
    %
    
    
    106.2
    %
 2004 Compared with 2003 Net results increased $1,077 million in 2004 as compared with 2003. This improvement was due
primarily to decreased unfavorable net prior year development of $912 million after-tax ($1,403
million pretax), a decrease in the bad debt provision recorded for insurance receivables of $57
million after-tax ($88 million pretax), a decrease in the bad debt provision for reinsurance
receivables of $48 million after-tax ($74 million pretax), decreased dividend development of $45
million after-tax ($69 million pretax), a decrease in certain insurance related assessments of $35
million after-tax ($54 million pretax) and increased net investment income of $57 million after-tax
($88 million 36




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##### Table of Contents



pretax), primarily due to reduced interest charges of $63 million after-tax ($97
million pretax) related to the corporate aggregate and other reinsurance treaties. These favorable
items were partially offset by decreased net realized investment results of $95 million after-tax
($142 million pretax) and increased catastrophe losses in 2004. The impact of catastrophes was
$183 million after-tax ($282 million pretax) and $71 million after-tax ($110 million pretax) for
2004 and 2003, as discussed below. These catastrophe impacts are net of anticipated reinsurance
recoveries, and include the effect of reinstatement premiums and estimated insurance assessments.
See the Investments section of the MD&A for further discussion on net investment income and net
realized investment gains. Net written premiums for Standard Lines increased $21 million in 2004 as compared with 2003. This
increase was primarily driven by decreased premiums ceded of $270 million to corporate aggregate
and other reinsurance treaties in 2004 as compared with 2003. The 2003 cessions were principally
due to the unfavorable net prior year development recorded in 2003. This favorable impact was partially
offset by lower new business as competition increases and carriers protect renewals, as well as
intentional underwriting actions in business classified as high hazard. Specifically impacting
retention was the impact of intentional underwriting actions, including reductions in certain
silica-related risks and workers compensation policies classified as high hazard. The net written
premium results are consistent with the Companys strategy of portfolio optimization. The
Companys priority is a diversified portfolio in profitable classes of business. Standard Lines averaged rate increases of 4%, 16% and 25% for 2004, 2003 and 2002 for the contracts
that renewed during those periods. Retention rates of 70%, 72% and 69% were achieved for those
contracts that were up for renewal. Competitive market pressures are expected to continue to
contribute to the moderation in rate increases as the property and casualty market pricing
continues to soften. Net earned premiums increased $387 million in 2004 as compared with 2003. This increase was
primarily driven by decreased ceded premiums of $270 million related to corporate aggregate and
other reinsurance treaties. The combined ratio decreased 37.5 points in 2004 as compared with 2003. The loss ratio decreased
27.4 points in 2004 as compared with 2003. These improvements were primarily due to decreased net
unfavorable prior year development of $1,403 million and a decrease in the bad debt provision
recorded for reinsurance receivables of $74 million. These favorable impacts on the 2004 loss
ratio were partially offset by increased catastrophe losses. Catastrophe losses of $260 million
and $110 million were recorded in 2004 and 2003. The increased 2004 catastrophe losses were
primarily due to a $235 million loss resulting from Hurricanes Charley, Frances, Ivan and Jeanne. Unfavorable net prior year development of $16 million was recorded in 2004, including $113 million
of unfavorable claim and allocated claim adjustment expense reserve development and $97 million of
favorable premium development. Unfavorable net prior year development of $1,419 million, including
$939 million of unfavorable claim and allocated claim adjustment expense reserve development and
$480 million of unfavorable premium development, was recorded in 2003. 37




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##### Table of Contents



The following table summarizes the gross and net carried reserves as of December 31, 2004 and 2003
for Standard Lines. Gross and Net Carried
Claim and Claim Adjustment Expense Reserves December 31,
    
    2004
    
    2003(In millions)Gross Case Reserves
    
    $
    6,904
    
    
    $
    6,416Gross IBNR Reserves
    
    
    7,398
    
    
    
    7,866Total Gross Carried Claim and Claim Adjustment
Expense Reserves
    
    $
    14,302
    
    
    $
    14,282Net Case Reserves
    
    $
    4,759
    
    
    $
    4,585Net IBNR Reserves
    
    
    4,544
    
    
    
    4,382Total Net Carried Claim and Claim Adjustment Expense
Reserves
    
    $
    9,303
    
    
    $
    8,967
 Approximately $190 million of unfavorable net prior year claim and allocated claim adjustment
expense development recorded during 2004 resulted from increased severity trends for workers
compensation on large account policies primarily in accident years 2002 and prior. Favorable
premium development on retrospectively rated large account policies of $50 million was recorded in
relation to this unfavorable net prior year claim and allocated claims adjustment expense
development. Approximately $60 million of unfavorable net prior year claim and allocated claim adjustment
expense development was recorded in involuntary pools in which the Companys participation is
mandatory and primarily based on premium writings. Approximately $15 million of this unfavorable
net prior year claim and allocated claim adjustment expense development was related to the
Companys share of the National Workers Compensation Reinsurance Pool (NWCRP). During 2004, the
NWCRP reached an agreement with a former pool member to settle their pool liabilities at an amount
less than their established share. The result of this settlement will be a higher allocation to
the remaining pool members, including the Company. The remainder of this unfavorable net prior
year claim and allocated claim adjustment expense development was primarily due to increased
severity trends for workers compensation exposures in older years. Approximately $60 million of unfavorable net prior year claim and allocated claim adjustment
expense development resulted from the change in estimates due to increased severity trends for
excess and surplus business driven by excess liability, liquor liability and coverages provided to
apartment and condominium complexes. Approximately $105 million of favorable net prior year claim
and allocated claim adjustment expense development resulted from reserve studies of commercial auto
liability policies and the liability portion of package policies. The change was due to
improvement in the severity and number of claims for this business. Approximately $85 million of
favorable net prior year claim and allocated claim adjustment expense development was due to
improvement in the severity and number of claims for property coverages primarily in accident year
2003. Other favorable net prior year premium development of approximately $50 million resulted primarily
from higher audit and endorsement premiums on workers compensation policies. In addition to the above, during 2004, the Company executed commutation agreements with several
members of the Trenwick Group. These commutations resulted in unfavorable claim and claim
adjustment expense reserve development which was more than offset by a release of a previously
established allowance for uncollectible reinsurance. The following discusses net prior year development for Standard Lines recorded in 2003. Approximately $495 million of unfavorable claim and allocated claim adjustment expense reserve
development was recorded related to construction defect claims in 2003. Based on analyses
completed during the third quarter of 38




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##### Table of Contents



2003, it became apparent that the assumptions regarding the
number of claims, which were used to estimate the expected losses, were no longer appropriate. The
analyses indicated that the number of claims reported was higher than expected primarily in states
other than California. States where this activity is most evident include Texas, Arizona, Nevada,
Washington and Colorado. The number of claims reported in states other than California during the
first six months of 2003 was almost 35% higher than the last six months of 2002. The number of
claims reported during the last six months of 2002 increased by less than 10% from the first six
months of 2002. In California, claims resulting from additional insured endorsements increased
throughout 2003. Additional insured endorsements are regularly included on policies provided to
subcontractors. The additional insured endorsement names general contractors and developers as
additional insureds covered by the policy. Current California case law (Presley Homes, Inc. v.
American States Insurance Company, (June 11, 2001) 90 Cal App. 4th 571, 108 Cal.
Rptr. 2d 686) specifies that an individual subcontractor with an additional insured obligation has
a duty to defend the additional insured in the entire action, subject to contribution or recovery
later. In addition, the additional insured is allowed to choose one specific carrier to defend the entire
action. These additional insured claims can remain open for a longer period of time than other
construction defect claims because the additional insured defense obligation can continue until the
entire case is resolved. The adverse reserve development recorded related to construction defect
claims was primarily related to accident years 1999 and prior. Unfavorable net prior year development of approximately $595 million, including $518 million of
unfavorable claim and allocated claim adjustment expense reserve development and $77 million of
unfavorable premium development, was recorded for large account business including workers
compensation coverages in 2003. Many of the policies issued to these large accounts include
provisions tailored specifically to the individual accounts. Such provisions effectively result in
the insured being responsible for a portion of the loss. An example of such a provision is a
deductible arrangement where the insured reimburses the Company for all amounts less than a
specified dollar amount. These arrangements often limit the aggregate amount the insured is
required to reimburse the Company. Analyses completed during 2003 indicated that the provisions
that result in the insured being responsible for a portion of the losses would have less of an
impact due to the larger size of claims as well as the increased number of claims. The net prior
year development recorded was primarily related to accident years 2000 and prior. Approximately $98 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003 resulted from a program covering facilities that
provide services to developmentally disabled individuals. This net prior year development was due
to an increase in the size of known claims and increases in policyholder defense costs. With
regard to average claim size, updated data showed the average claim size increasing at an annual
rate of approximately 20%. Prior data had shown average claim size to be level. Similar to the
average claim size, updated data showed the average policyholder defense cost increasing at an
annual rate of approximately 20%. Prior data had shown average policyholder defense cost to be
level. The net prior year development recorded was primarily for accident years 2001 and prior. Approximately $40 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003 was for excess workers compensation coverages due to
increasing severity. The increase in severity means that a higher percentage of the total loss
dollars will be the Companys responsibility since more claims will exceed the point at which the
Companys coverage begins. The net prior year development recorded was primarily for accident year
2000. Approximately $73 million of unfavorable development recorded in 2003 was the result of a
commutation of all ceded reinsurance treaties with the Gerling Global Group of companies (Gerling),
related to accident years 1999 through 2001, including $41 million of unfavorable claim and
allocated claim adjustment expense development and $32 million of unfavorable premium development. Unfavorable net prior year claim and allocated claim adjustment expense reserve development of
approximately $40 million recorded in 2003 was related to a program covering tow truck and
ambulance operators, primarily impacting the 2001 accident year. The Company had previously
expected that loss ratios for this business would be similar to its middle market commercial
automobile liability business. During 2002, the Company ceased writing business under this
program. Approximately $25 million of unfavorable net prior year premium development recorded in 2003 was
related to a second quarter of 2003 reevaluation of losses ceded to a reinsurance contract covering
middle market workers 39




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##### Table of Contents



compensation exposures. The reevaluation of losses led to a new estimate of
the number and dollar amount of claims that would be ceded under the reinsurance contract. As a
result of the reevaluation of losses, the Company recorded approximately $36 million of unfavorable
claim and allocated claim adjustment expense reserve development, which was ceded under the
contract. The net prior year development was recorded for accident year 2000. Approximately $11 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003 was related to directors and officers exposures in
Global Lines. The unfavorable net prior year reserve development was primarily due to securities
class action cases related to certain known corporate malfeasance cases and investment banking
firms. This net prior year development recorded was primarily for accident years 2000 through
2002. The following premium and claim and allocated claim adjustment expense development was recorded in
2003 as a result of the elimination of deficiencies and redundancies in reserve positions within
the segment. Unfavorable net prior year development of approximately $210 million related to small
and middle market workers compensation exposures and approximately $110 million related to E&S
lines was recorded in 2003. Offsetting these increases was $210 million of favorable net prior
year development in the property line of business, including $79 million related to the September
11, 2001 World Trade Center Disaster and related events (WTC event). Also, offsetting the unfavorable premium and claim and allocated claim adjustment expense
development was a $216 million underwriting benefit from cessions to corporate aggregate
reinsurance treaties recorded in 2003. The benefit is comprised of $485 million of ceded losses
and $269 million of ceded premiums for accident years 2000 and 2001. The expense ratio decreased 8.1 points in 2004 as compared with 2003. This decrease in 2004 was
primarily due to an increased net earned premium base, an $88 million decrease in the provision for
uncollectible insurance receivables, a $54 million decrease in certain insurance related
assessments and reduced expenses as a result of expense reduction initiatives as compared with the
same period in 2003. Partially offsetting these favorable impacts was $14 million of estimated
underwriting assessments related to the 2004 Florida hurricanes. During 2004, additional bad debt provisions for insurance receivables of $150 million were recorded
as compared to $242 million recorded in 2003. The substantial bad debt provisions for insurance
receivables in 2004 and 2003 were primarily related to Professional Employer Organization (PEO)
accounts. During 2002, Standard Lines ceased writing coverages for PEO businesses, with the last
contracts expiring on June 30, 2003. In the third quarter of 2003, the Company performed a review
of PEO accounts to estimate ultimate losses and the indicated recoveries under retrospective
premium or high-deductible provisions of the insurance contracts. Based on the 2003 analysis of
the credit standing of the individual PEO accounts and the amount of collateral held, the Company
recorded an increase in the bad debt provision. In the third quarter of 2004, the review of PEO
accounts was updated and the population of accounts reviewed was expanded to include Temporary Help
accounts as well. Payroll audits performed since the last study identified that the exposure base
for many accounts was higher than expected. In addition, recovery estimates were updated based on
current credit information on the insured. Based on the updated study, the Company recorded an
estimated bad debt provision of $95 million in the third quarter of 2004 for these accounts. In 2004, the expense ratio was adversely impacted by an additional $55 million bad debt provision
for insurance receivables. The primary drivers of the provision were the completion of updated
ultimate loss projections on all large account business where the insured is currently in
bankruptcy and a comprehensive review of all billed balances that are past due. The dividend ratio decreased 2.0 points in 2004 as compared with 2003 due to favorable net prior
year dividend development of $23 million in 2004, as compared to unfavorable net prior year
dividend development of $46 million in 2003, primarily related to workers compensation products.
The favorable 2004 dividend development was related to a review that was completed in 2004 which
indicated dividends were lower than prior expectations based on decreased usage of dividend
programs. 40




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##### Table of Contents



2003 Compared with 2002 Net results decreased $764 million in 2003 as compared with 2002. The decrease in net results was
primarily driven by increased unfavorable net prior year development of $999 million after-tax
($1,538 million pretax), an increase in the bad debt provision for insurance and reinsurance
receivables of $193 million after-tax ($297 million pretax), an increase in certain
insurance-related assessments of $49 million after-tax ($74 million pretax) and decreased net
investment income primarily due to increased interest expense of $78 million after-tax ($120
million pretax) related to additional cessions to the corporate aggregate and other reinsurance
treaties. Partially offsetting these decreases were increases in net realized investment gains and
$94 million after-tax ($145 million pretax) of increased limited partnership income. See the
Investments section of this MD&A for further discussion on net investment income and net realized
investment gains (losses). Net results for 2002 also included a $43 million after-tax ($43 million
pretax) cumulative effect of a change in accounting principle charge related to goodwill
impairment. Net written premiums for Standard Lines decreased $194 million and net earned premiums decreased
$148 million in 2003 as compared with 2002. These decreases were due primarily to increased ceded
premiums of $259 million, including premiums ceded to corporate aggregate and other reinsurance
treaties, primarily as a result of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003. Premiums also decreased as a result of a shift in
the mix of business to high deductible policies, which generally have lower premiums. Partially
offsetting these declines were increased premiums across most P&C and E&S lines as a result of new
business initiatives and rate increases. The combined ratio increased 36.8 points in 2003 as compared with 2002. The loss ratio increased
25.0 points due principally to an increase in unfavorable net prior year development in 2003 as
compared with 2002, as discussed below, an increase in the bad debt expense reserve for reinsurance
receivables of $55 million and $110 million of catastrophe losses which occurred during 2003.
Catastrophe losses were $38 million in 2002. Based on the Companys credit exposure to reinsurance
receivables, an increase in the bad debt reserve was deemed appropriate. See the Reinsurance
section of this MD&A for additional information. Partially offsetting these unfavorable variances
was an improvement in the current net accident year loss ratio. Unfavorable net prior year development of $1,419 million, including $939 million of unfavorable
claim and allocated claim adjustment expense reserve development and $480 million of unfavorable
premium development, was recorded in 2003. Favorable net prior year development of $119 million,
including $205 million of favorable claim and allocated claim adjustment expense reserve
development and $86 million of unfavorable premium development, was recorded in 2002. The discussion of the net prior year development recorded in 2003 was discussed in the 2004
compared with 2003 section above. The following discusses net prior year development for Standard Lines recorded in 2002. Approximately $140 million of favorable net prior year development was attributable to
participation in the Workers Compensation Reinsurance Bureau (WCRB), a reinsurance pool, and
residual markets. The favorable prior year reserve development for WCRB was the result of
information received from the WCRB that reported the results of a recent actuarial review. This
information indicated that the Companys net required reserves for accident years 1970 through 1996
were $60 million less than the carried reserves. In addition, during 2002, the Company commuted
accident years 1965 through 1969 for a payment of approximately $5 million to cover carried
reserves of approximately $13 million, resulting in further favorable net prior year claim and
allocated claim adjustment expense development of $8 million. The favorable residual market net
prior year development was the result of lower than expected paid loss activity during recent
periods for accident years dating back to 1984. The paid losses during 2002 on prior accident
years were approximately 60% of the previously expected amount. In addition, Standard Lines had favorable net prior year development, primarily in the package
liability and auto liability lines of business due to the then new claims initiatives. These new
claims initiatives, which included
specialized training on specific areas of the claims adjudication process, enhanced claims
litigation management, enhanced adjuster-level metrics to monitor performance and more focused
metric-based claim file review and oversight, were expected to produce significant reductions in
ultimate claim costs. Based on managements best 41




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estimate of the reduction in ultimate claim
costs, approximately $100 million of favorable net prior year development was recorded in 2002.
Approximately one-half of this favorable net prior year development was recorded in accident years
prior to 1999, with the remainder of the favorable net prior year development recorded in accident
years 1999 to 2001. Approximately $50 million of favorable net prior year development during 2002 was recorded in
commercial automobile liability. Most of the favorable development was from accident year 2000.
An actuarial review completed during 2002 showed that underwriting actions had resulted in reducing
the number of commercial automobile liability claims for then recent accident years, especially the
number of large losses. Approximately $45 million of favorable net prior year development was recorded in property lines
during 2002. The favorable net prior year development was principally from accident years 1999
through 2001, and was the result of the low number of large losses in recent years. Although
property claims are generally reported relatively quickly, determining the ultimate cost of the
claim can involve a significant amount of time between the occurrence of the claim and settlement. Offsetting these favorable net prior year developments were approximately $100 million of
unfavorable premium development in middle market workers compensation, approximately $70 million of
unfavorable net prior year claim and allocated claim adjustment expense development in programs
written in CNA E&S, approximately $30 million of unfavorable net prior year claim and allocated
claim adjustment expense development on a contractors account package policy program and
approximately $20 million of unfavorable net prior year claim and allocated claim adjustment
expense development on middle market general liability coverages. The unfavorable net prior year
development on workers compensation was principally due to additional reinsurance premiums for
accident years 1999 through 2001. A CNA E&S program, covering facilities that provide services to developmentally disabled
individuals, accounts for approximately $50 million of the unfavorable net prior year development.
The net prior year development was due to an increase in the size of known claims and increases in
policyholder defense costs. These increases became apparent as the result of an actuarial review
completed during 2002, with most of the development from accident years 1999 and 2000. The other
program which contributed to the CNA E&S development covered tow truck and ambulance operators in
the 2000 and 2001 accident years. This program was started in 1999. The Company expected that
loss ratios for this business would be similar to its middle market commercial automobile liability
business. Reviews completed during 2002 resulted in estimated loss ratios on the tow truck and
ambulance business that were 25 points higher than the middle market commercial automobile
liability loss ratios. The marine business recorded unfavorable net prior year development of approximately $15 million
during 2002. The net prior year development for the marine business was due principally to
unfavorable reserve development on hull and liability coverages from accident years 1999 and 2000
offset by favorable reserve development on cargo coverages recorded for accident year 2001.
Reviews completed during 2002 showed additional reported losses on individual large accounts and
other bluewater business that drove the unfavorable hull and liability development. The unfavorable net prior year development on contractors account package policies was the result
of a review completed during 2002. Since this program is no longer being written, the Company
expected that the change in reported losses would decrease each quarterly period. However, in then
recent quarterly periods, the change in reported losses was higher than prior quarters, resulting
in the unfavorable reserve development. The expense ratio increased 11.2 points due to increased expenses and decreased net earned premiums
in 2003 as compared with 2002. Acquisition expenses were unfavorably impacted by an increase in
the bad debt expense reserve for insurance receivables of $242 million. The increase in the bad
debt provision for insurance receivables was primarily the result of a review of PEO accounts as
well as certain accounts that have been turned over to third parties for collection. During 2002,
Standard Lines ceased writing coverages for PEO businesses, with the last contracts expiring on
June 30, 2003. The review analyzed losses and the related receivable including the associated
collateral held by the Company. Upon completion of the review, it was determined that the ultimate
loss estimates
were larger than previously expected, which increased the amount of uncollateralized receivables.
Based on these factors, an increase in the provision was recorded. 42




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Additionally, acquisition expenses increased as a result of a $44 million increase in certain
insurance-related assessments recorded in 2003 as compared with a $30 million reduction in accruals
for certain insurance-related assessments resulting from changes, due to legislation, in the basis
on which the assessments were recorded in 2002. Also increasing the expense ratio was
approximately $62 million of expenses related to eBusiness in 2003. The 2002 eBusiness expenses
were included in the Corporate and Other Non-Core segment. The dividend ratio increased 0.6 points in 2003 as compared with 2002 due primarily to increased
unfavorable net prior year dividend development. The $42 million increase in unfavorable dividend
development was primarily related to workers compensation products. A review was completed in 2003
indicating dividend development that was higher than prior expectations. This development related
to accident years 2002 and prior. SPECIALTY LINES Business Overview Specialty Lines provides professional, financial and specialty property and casualty products and
services through a network of brokers, managing general underwriters and independent agencies.
Specialty Lines provides solutions for managing the risks of its clients, including architects,
engineers, lawyers, healthcare professionals, financial intermediaries and corporate directors and
officers. Product offerings also include surety and fidelity bonds and vehicle and equipment
warranty services. Specialty Lines includes the following business groups: Professional Liability Insurance, Surety
and Warranty. Professional Liability Insurance(CNA Pro) provides management and professional liability insurance
and risk management services, primarily in the United States. This unit provides professional
liability coverages to various professional firms, including architects and engineers, realtors,
non-Big Four accounting firms, law firms and technology firms. CNA Pro also has market positions
in directors and officers (D&O), errors and omissions, employment practices, fiduciary and fidelity
coverages. Specific areas of focus include larger firms as well as privately held firms and
not-for-profit organizations where CNA offers tailored products for this client segment. Products
within CNA Pro are distributed through brokers, agents and managing general underwriters. CNA Pro, through CNA HealthPro, also offers insurance products to serve the healthcare delivery
system. Products are distributed on a national basis through a variety of channels including
brokers, agents and managing general underwriters. Key customer segments include long term care
facilities, allied healthcare providers, life sciences, dental professionals and mid-size and large
healthcare facilities and delivery systems. Suretyconsists primarily of CNA Surety and its insurance subsidiaries and offers small, medium and
large contract and commercial surety bonds. CNA Surety provides surety and fidelity bonds in all
50 states through a combined network of independent agencies. CNA owns approximately 64% of CNA
Surety. Warrantyprovides vehicle warranty service contracts that protect individuals and businesses from
the financial burden associated with breakdown, under-performance or maintenance of a product. 43




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The following table details results of operations for Specialty Lines. Results of Operations Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Net written premiums
    
    $
    2,391
    
    
    $
    2,038
    
    
    $
    1,574Net earned premiums
    
    
    2,277
    
    
    
    1,840
    
    
    
    1,451Income (loss) before net realized investment gains (losses)
    
    
    324
    
    
    
    (34
    )
    
    
    90Net realized investment gains (losses)
    
    
    54
    
    
    
    74
    
    
    
    (25
    )Net income
    
    
    378
    
    
    
    40
    
    
    
    60RatiosLoss and loss adjustment expense
    
    
    63.3
    %
    
    
    89.6
    %
    
    
    73.5
    %Expense
    
    
    26.1
    
    
    
    27.6
    
    
    
    29.3Dividend
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Combined
    
    
    89.6
    %
    
    
    117.4
    %
    
    
    103.0
    %
 2004 Compared with 2003 Net results improved $338 million in 2004 as compared with 2003. This improvement was due
primarily to decreased unfavorable net prior year development of $171 million after-tax ($264
million pretax), a decrease in the bad debt provision for reinsurance receivables of $78 million
after-tax ($120 million pretax), a decrease in certain insurance related assessments of $8 million
after-tax ($12 million pretax) and increased net investment income. These improvements were
partially offset by decreased net realized investment gains of $20 million after-tax ($30 million
pretax) and increased catastrophe losses in 2004. The impact of catastrophes was $11 million
after-tax ($16 million pretax) and $3 million after-tax ($4 million pretax) in 2004 and 2003, as
discussed below. See the Investments section of this MD&A for further discussion on net investment
income and net realized investment gains. Net written premiums for Specialty Lines increased $353 million and net earned premiums increased
$437 million in 2004 as compared with 2003. This increase was primarily due to rate increases and
improved retention, principally in Professional Liability Insurance, and decreased premiums ceded
to corporate aggregate and other reinsurance treaties of $26 million in 2004 as compared with 2003.
The 2003 ceded premiums were principally driven by the unfavorable net prior year reserve
development in 2003. Specialty Lines averaged rate increases of 9%, 29% and 31% in 2004, 2003 and 2002 for the contracts
that renewed during those periods. Retention rates of 83%, 81% and 77% were achieved for those
contracts that were up for renewal. CNA expects rate achievement will moderate as competition for
premiums continues to accelerate in these lines of business. The combined ratio decreased 27.8 points in 2004 as compared with 2003. The loss ratio decreased
26.3 points due principally to decreased unfavorable net prior year development of $264 million, a
$120 million decrease in bad debt reserves for uncollectible reinsurance and an improvement in the
current net accident year loss ratio. These favorable impacts to the loss ratio were partially
offset by increased catastrophe losses. Catastrophe losses of $15 million and $4 million were
recorded in 2004 and 2003. The increased catastrophe losses in 2004 were due to $12 million of
losses resulting from Hurricanes Charley, Frances, Ivan and Jeanne. Unfavorable net prior year development was $30 million, including $58 million of unfavorable claim
and allocated claim adjustment expense and $28 million of favorable premium development, in 2004.
Unfavorable net prior year development of $294 million, including $257 million of unfavorable claim
and allocated claim adjustment expense development and $37 million of unfavorable premium
development, was recorded for the same period in 2003. 44




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The following table summarizes the gross and net carried reserves as of December 31, 2004 and 2003
for Specialty Lines. Gross and Net CarriedClaim and Claim Adjustment Expense
ReservesDecember 31,(In millions)
    
    2004
    
    2003Gross Case Reserves
    
    $
    1,659
    
    
    $
    1,605Gross IBNR Reserves
    
    
    3,201
    
    
    
    2,595Total Gross Carried Claim and Claim Adjustment
Expense Reserves
    
    $
    4,860
    
    
    $
    4,200Net Case Reserves
    
    $
    1,191
    
    
    $
    1,087Net IBNR Reserves
    
    
    2,042
    
    
    
    1,832Total Net Carried Claim and Claim Adjustment
Expense Reserves
    
    $
    3,233
    
    
    $
    2,919
 In 2004, the Company finalized commutation agreements with several members of the Trenwick
Group. These commutations resulted in unfavorable claim and claim adjustment expense reserve
development which was more than offset by a release of a previously established allowance for
uncollectible reinsurance. Additionally, unfavorable net prior year claim and allocated claim
adjustment expense reserve development resulted from the increased emergence of several large D&O
claims primarily in recent accident years. The following discusses net prior year development for Specialty Lines recorded in 2003. Approximately $50 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003 was related to increased severity in excess coverages
provided to facilities providing health care services. The increase in reserves was based on
reviews of individual accounts where claims had been expected to be less than the point at which
the Companys coverage applied. The then current claim trends indicated that the layers of
coverage provided by the Company would be impacted. The net prior year development recorded was
primarily for accident years 2001 and prior. Approximately $68 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003 was for surety coverages related primarily to workers
compensation bond exposure from accident years 1990 and prior and large losses for accident years
1999 and 2002. Approximately $21 million of unfavorable net prior year claim and allocated claim
adjustment expense reserve development was recorded in the surety line of business in 2003 as the
result of recent developments on one large claim. Approximately $75 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003 was related to directors and officers exposures in CNA
Pro. The unfavorable net prior year reserve development was primarily due to securities class
action cases related to certain known corporate malfeasance cases and investment banking firms.
This net prior year development recorded was primarily for accident years 2000 through 2002. Approximately $84 million of losses were recorded during 2003 as the result of a commutation of
ceded reinsurance treaties with Gerling covering CNA HealthPro, relating to accident years 1999
through 2002. Further information regarding this commutation is provided in the Reinsurance
section of this MD&A. The following net prior year development was recorded in 2003 as a result of the elimination of
deficiencies and redundancies in reserve positions within the segment. An additional $50 million
of unfavorable net prior year claim and allocated claim adjustment expense reserve development was
recorded related to medical malpractice and long term care facilities. Partially offsetting this
unfavorable claim and allocated claim adjustment expense reserve development was a $25 million
underwriting benefit from cessions to corporate aggregate reinsurance treaties. The 45




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benefit was
comprised of $56 million of ceded losses and $31 million of ceded premiums for accident years 2000
and 2001. The expense ratio decreased 1.5 points primarily due to the increased earned premium base and a
decrease of $12 million in certain insurance related assessments recorded in 2003. Additionally,
the expense ratio was favorably impacted by decreased underwriting expenses due to the Companys
expense initiatives. 2003 Compared with 2002 Net income was $40 million in 2003 as compared with $60 million in 2002. The decrease in net
results was primarily due to increased unfavorable net prior year development of $152 million
after-tax ($234 million pretax), an increase in the bad debt provision for reinsurance receivables
of $50 million after-tax ($77 million pretax) and increased interest expense of $4 million
after-tax ($5 million pretax) related to additional cessions to the corporate aggregate reinsurance
treaties. The unfavorable impacts to net results were principally offset by improved current net
accident year results primarily attributable to premium rate increases and increased net realized
investment results. See the Investments section of this MD&A for further discussion of net
investment income and net realized gains (losses). Net results for 2002 also included a $5 million
after-tax ($8 million pretax) cumulative effect of a change in accounting principle charge related
to goodwill impairment. Net written premiums for Specialty Lines increased $464 million and net earned premiums increased
$389 million in 2003 as compared with 2002. These increases were due primarily to rate increases
and increased new business, primarily in CNA Pro. The combined ratio increased 14.4 points in 2003 as compared with 2002. The loss ratio increased
16.1 points due principally to increased unfavorable net prior year development, as discussed
below. Additionally, the loss ratio was negatively impacted by a $77 million increase in the bad
debt provision for reinsurance receivables, a $22 million increase in ULAE reserves and $49 million
of current accident year losses for Surety, related to large losses in 2003, and $20 million of
current accident year losses for directors and officers exposures in CNA Pro, which primarily
related to recent securities class action cases related to certain mutual fund firms. These items
were partially offset by the improvement in the current net accident year loss ratio on the other
lines of business and the impact of higher net earned premiums. Unfavorable net prior year development of $294 million, including $257 million of net unfavorable
claim and allocated claim adjustment expense reserve development and $37 million of unfavorable
premium development, was recorded in 2003 for Specialty Lines. Unfavorable net prior year
development of $60 million, including $14 million of net unfavorable claim and allocated claim
adjustment expense reserve development and $46 million of unfavorable premium development, was
recorded in 2002 for Specialty Lines. The discussion of the net prior year development recorded in 2003 was included in the 2004
compared with 2003 section above. The following discusses net prior year development for Specialty Lines recorded in 2002. Unfavorable net prior year development of approximately $180 million was recorded for CNA HealthPro
in 2002 and was driven principally by medical malpractice excess products provided to hospitals and
physicians and coverages provided to long term care facilities, principally national for-profit
nursing homes. Approximately $100 million of the net prior year unfavorable development was
related to assumed excess products and loss portfolio transfers, and was primarily driven by
unexpected increases in the number of excess claims in accident years 1999 and 2000. The
percentage of total claims greater than $1 million has increased by 33%, from less than 3% of all
claims to more than 4% of all claims. CNA HealthPro no longer writes assumed excess products and
loss portfolio transfers. Approximately $50 million of the unfavorable net prior year development was related to long term
care facilities. The unfavorable net prior year development was principally recorded for accident
years 1997 through 2000. The average value of claims closed during the first several months of
2002 increased by more than 50% when compared to claims closed during 2001. In response to those
trends, CNA HealthPro has reduced its writings of national for- 46




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profit nursing home chains. Excess
products provided to healthcare institutions and physician coverages in a limited number of states
were responsible for the remaining development in CNA HealthPro. The unfavorable net prior year
development on excess products provided to institutions for accident years 1996 through 1999
resulted from increases in the size of claims experienced by these institutions. Due to the
increase in the size of claims, more claims were exceeding the point at which these excess products
apply. The unfavorable net prior year development on physician coverages was recorded for accident
years 1999 through 2001 in Oregon, California, Arizona and Nevada. The average claim size in these
states has increased by 20%, driving the change in losses. Offsetting this unfavorable net prior year development was favorable net prior year development in
CNA Pro and for Enron related exposures. Programs providing professional liability coverage to
accountants, lawyers and realtors primarily drove favorable net prior year development of
approximately $110 million in CNA Pro. Reviews of this business completed during 2002 showed
little activity for older accident years (principally prior to 1999), which reduced the need for
reserves on these years. The reported losses on these programs for accident years prior to 1999
increased by approximately $5 million during 2002. This increase compared to the total reserve at
the beginning of 2002 of approximately $180 million, net of reinsurance. Additionally, favorable
net prior year development of $20 million was associated with the Enron settlement. The Company
had established a $20 million reserve for accident year 2001 for an excess layer associated with
Enron related surety losses; however the case was settled for less than the attachment point of
this excess layer. A $12 million underwriting benefit was recorded for cessions to the corporate aggregate reinsurance
treaties in 2002. The benefit was comprised of $41 million of
ceded losses and $29 million of
ceded premium for accident year 2001. The expense ratio decreased 1.7 points primarily due to the increased net earned premium base,
partially offset by an increase in certain insurance related assessments of $11 million. LIFE AND GROUP NON-CORE Business Overview The Life and Group Non-Core segment consists of Group Operations and Life Operations (formerly
separate reportable segments) including the run-off of the related group and life products that
have been combined into one reportable segment. Additionally, other run-off life and group
operations that were previously reported in the Corporate and Other segment, including group
reinsurance, are also included in the Life and Group Non-Core segment. The segment includes
operating results for periods prior to the sale and the realized gain/loss from the sale for the
group benefits business that was sold on December 31, 2003, the individual life business that was
sold on April 30, 2004, the CNA Trust business that was sold on August 1, 2004 and the effects of
the shared corporate overhead expenses which continue to be allocated to the sold businesses.
Additionally, on July 1, 2002, the Company sold its federal health plan administrator, Claims
Administration Corporation, and transferred the Mail Handlers Plan to First Health Group. Life and Group Non-Core includes the following lines of business: Life & Annuity, Health and
Other. Life & Annuityconsists primarily of individual term, universal life and permanent life insurance
products, guaranteed investment contracts, as well as individual and group annuity products. As
discussed above, on April 30, 2004, certain of these products were sold. The remaining businesses
are being managed as a run-off operation; however certain businesses focused on institutional
investors are accepting new deposits from existing customers. Healthconsists primarily of the Group Benefits business, group long term care, individual long
term care and specialty medical products and related services. On December 31, 2003, CNA completed
the sale of the Group Benefits business. CNA is continuing to service its existing group and
individual long term care commitments and
is managing these businesses as a run-off operation. In January of 2005, the specialty medical
business was sold to Aetna. This business contributed $16 million, $9 million and $2 million of
net income for 2004, 2003 and 2002. Otherconsists primarily of group reinsurance and life settlement contracts. These businesses are
being managed as a run-off operation. 47




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The following table summarizes the results of operations for Life and Group Non-Core. Operating Results Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Net earned premiums
    
    $
    921
    
    
    $
    2,376
    
    
    $
    3,408Income (loss) before net realized investment losses
    
    
    (29
    )
    
    
    113
    
    
    
    206Net realized investment losses
    
    
    (385
    )
    
    
    (108
    )
    
    
    (115
    )Net income (loss)
    
    
    (414
    )
    
    
    5
    
    
    
    48
 2004 Compared with 2003 Net earned premiums for Life and Group Non-Core decreased $1,455 million in 2004 as compared with
2003. The decrease in net earned premiums was due primarily to the absence of premiums from the
group benefits business and reduced premiums for the individual life business. Net earned premiums
for the sold life and group businesses were $115 million and $1,459 million for 2004 and 2003. Net
earned premiums also decreased in most of the remaining lines of business which are in runoff, and
this decline is expected to continue in the future. Partially offsetting this decrease was an
increase in net earned premiums in the specialty medical business, which continued to issue new
policies prior to its sale in January 2005. Net results decreased by $419 million in 2004 as compared with 2003. The decrease in net results
related primarily to net realized investment losses, including the realized loss of approximately
$389 million after-tax ($622 million pretax) from the sale of the individual life business and
reduced results from the group benefits and individual life businesses. Net realized investment
losses in 2003 include a loss recorded on the sale of the Group Benefits business of $130 million
after-tax ($176 million pretax). Net results for the sold life and group businesses were losses of
$427 million and $36 million, including the loss on sales and the effects of shared corporate
overhead expenses, in 2004 and 2003. In addition, results for life settlement contracts declined
in 2004. These items were partially offset by reduced increases in individual long term care
reserves of $21 million after-tax ($32 million pretax) in 2004 as compared with 2003. Also
included in the net results of 2004 and 2003 were the adverse impacts of $26 million
after-tax ($40 million pretax) and
$33 million after-tax ($50 million pretax) related to certain accident and health exposures (IGI
Program) and the Companys past participation in accident and health reinsurance programs. 2003 Compared with 2002 Net earned premiums for Life and Group Non-Core decreased $1,032 million in 2003 as compared with
2002. The decrease in net earned premiums was due primarily to the transfer of the Mail Handlers
Plan. The Mail Handlers Plan contributed net earned premiums of $1,151 million in 2002. This
decline was partially offset by premium growth in the disability, specialty medical, life and
accident and long term care products within group benefits due to increased new sales and rate
increases, and higher sales of structured settlement annuities, growth in life insurance products
and rate increases on the individual long term care product inforce blocks. Net income decreased by $43 million in 2003 as compared with 2002. Net income in 2003 was
adversely impacted by $130 million after-tax ($176 million pretax) loss recorded on the sale of the
Group Benefits business. In 2002, net income was adversely impacted by impairment losses. See the
Investments section of this MD&A for additional information. Additionally, the decrease in net
income was due to unfavorable net prior year claim and allocated claim adjustment expense reserve
development of $33 million after-tax ($50 million pretax) that was recorded in relation to the
Companys past participation in several insurance pools, which is part of the group reinsurance
run-off business, and increases in individual long term care reserves of $4 million after-tax ($7
million pretax) due to increased severity and claim frequency. Additionally a change in the
discount rate on prior year disability and life waiver of premium reserves from 6.5% to 6.0%,
resulted in a $14 million after-tax ($22 million pretax) decrease in
net income. The change in discount rate reflected the decreasing portfolio yield and the then
current investment environment. The decrease was also due to severance costs of $3 million
after-tax ($4 million pretax) related to the individual long term care product. These items were
partially offset by an improvement in net results for life settlement contracts of $25 million
after-tax ($39 million pretax), increased favorable net prior year development related to a $7
million after-tax ($11 million pretax) release of WTC event reserves and the absence of the 48




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cumulative effect of a change in accounting principle of $8 million after-tax ($12 million pretax)
recorded in 2002 relating to the write-down of impaired goodwill. CORPORATE AND OTHER NON-CORE Overview Corporate and Other Non-Core includes the results of certain property and casualty lines of
business placed in run-off. CNA Re, formerly a separate property and casualty operating segment,
is currently in run-off and is now included in the Corporate and Other Non-Core segment. This
segment also includes the results related to the centralized adjusting and settlement of APMT
claims as well as the results of CNAs participation in voluntary insurance pools and various other
non-insurance operations. Other operations also include interest expense on corporate borrowings
and intercompany eliminations. The following table summarizes the results of operations for the Corporate and Other Non-Core
segment, including APMT and intrasegment eliminations. Operating Results Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Revenues
    
    $
    353
    
    
    $
    729
    
    
    $
    952Net investment income
    
    
    241
    
    
    
    218
    
    
    
    262Net income (loss)
    
    
    117
    
    
    
    (761
    )
    
    
    
 2004 Compared with 2003 Revenues decreased $376 million in 2004 as compared with 2003. The decrease in revenues was due
primarily to reduced net earned premiums in CNA Re due to the exit of the assumed reinsurance
market in October of 2003 and decreased realized investment gains of $62 million pretax. CNA Re
had earned premiums of $125 million and $536 million in 2004 and 2003. See the Investments section
of this MD&A for additional information on net realized investment gains (losses) and net
investment income. Net income increased $878 million in 2004 as compared with 2003. The increase in net income was
due primarily to a $636 million after-tax ($978 million pretax) decrease in unfavorable net prior
year development, a $168 million after-tax ($258 million pretax) decrease in the provision for
uncollectible reinsurance receivables, the absence in 2004 of a
$44 million after-tax ($67 million pretax) increase in
ULAE reserves recorded in 2003 and a $16 million after-tax ($24 million
pretax) decrease in certain insurance related
assessments. Additionally, the net results were favorably impacted by $14 million after-tax ($21
million pretax) of non-recurring income related to a release of purchase accounting reserves
related to real estate leases assumed in connection with the 1995 acquisition of Continental. Unfavorable net prior year development of $96 million was recorded during 2004, including $87
million of unfavorable net prior year claim and allocated claim adjustment expense reserve
development and $9 million of unfavorable premium development. Unfavorable net prior year
development of $1,074 million was recorded in 2003, including $1,048 million of unfavorable net
prior year claim and allocated claim adjustment expense reserve development and $26 million of
unfavorable premium development. 49




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The following table summarizes the gross and net carried reserves as of December 31, 2004 and 2003
for Corporate and Other Non-Core. Gross and Net CarriedClaim and Claim Adjustment Expense ReservesDecember 31,(In millions)
    
    2004
    
    2003Gross Case Reserves
    
    $
    3,803
    
    
    $
    4,342Gross IBNR Reserves
    
    
    4,875
    
    
    
    5,330Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    8,678
    
    
    $
    9,672Net Case Reserves
    
    $
    1,485
    
    
    $
    1,879Net IBNR Reserves
    
    
    1,691
    
    
    
    1,858Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    3,176
    
    
    $
    3,737
 In 2004, the Company executed commutation agreements with several members of the Trenwick
Group. These commutations resulted in unfavorable net prior year claim and allocated claim
adjustment expense reserve development partially offset by a release of a previously established
allowance for uncollectible reinsurance. The remainder of the unfavorable net prior year claim and
allocated claim adjustment expense reserve development in 2004 resulted from several other small
commutations and increases to net reserves due to reducing ceded losses, partially offset by a release of a previously established allowance for uncollectible reinsurance. The following discusses net prior year development for the Corporate and Other Non-Core Segment
recorded during 2003. This development was primarily driven by $795 million of unfavorable net prior year claim and
allocated claim adjustment expense reserve development related to APMT. See the APMT Reserves
section of this MD&A for further discussion of APMT development. In addition to APMT development, there was unfavorable net prior year development recorded in 2003
related to CNA Re of $149 million and $75 million related to voluntary pools. Unfavorable net prior year claim and allocated claim adjustment expense reserve development of
approximately $25 million was recorded in CNA Re primarily for directors and officers exposures.
The unfavorable net prior year development was a result of a claims review that was completed
during the second quarter of 2003. The unfavorable net prior year development was primarily due to
securities class action cases related to certain known corporate malfeasance cases and investment
banking firms. The unfavorable net prior year development recorded was for accident years 2000 and
2001. The CNA Re unfavorable net prior year development for 2003 was also due to a general change in the
pattern of how losses emerged over time as reported by the companies that purchased reinsurance
from CNA Re. Losses have continued to show large increases for accident years in the late 1990s
and into 2000 and 2001. These increases are greater than the increases indicated by patterns from
older accident years and had a similar effect on several lines of business. Approximately $67
million unfavorable net prior year development recorded in 2003 was related to proportional
liability exposures, primarily from multi-line and umbrella treaties in accident years 1997 through
2001. Approximately $32 million of unfavorable net prior year development recorded in 2003 was
related to
assumed financial reinsurance for accident years 2001 and prior and approximately $24 million of
unfavorable net prior year development was related to professional liability exposures in accident
years 2001 and prior. Additionally, CNA Re recorded $15 million of unfavorable net prior year development for
construction defect related exposures. Because of the unique nature of this exposure, losses have
not followed expected development 50




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patterns. The continued reporting of claims in California, the
increase in the number of claims from states other than California and a review of individual
ceding companies exposure to this type of claim resulted in an increase in the estimated reserve. The following premium and claim and allocated claim adjustment expense development, was recorded in
2003 as a result of the elimination of deficiencies and redundancies in the reserve positions of
individual products within CNA Re. Unfavorable net prior year premium and claim and allocated
claim adjustment expense development of approximately $42 million related to Surety exposures, $32
million related to excess of loss liability exposures and $12 million related to facultative
liability exposures were recorded in the third quarter of 2003. Offsetting this unfavorable net prior year development was approximately $55 million of favorable
net prior year development related to the WTC event as well as a $45 million underwriting benefit
from cessions to corporate aggregate reinsurance treaties recorded in 2003. The benefit from
cessions to the corporate aggregate reinsurance treaties was comprised of $102 million of ceded
losses and $57 million of ceded premiums for accident years 2000 and 2001. See the Reinsurance
section of this MD&A for further discussion of the Companys aggregate reinsurance treaties. Unfavorable net prior year claim and allocated claim adjustment expense reserve development of
approximately $75 million was recorded during the third quarter of 2003 related to an adverse
arbitration decision involving a single large property and business interruption loss on a
voluntary insurance pool. The decision was rendered against a voluntary insurance pool in which
the Company was a participant. The loss was caused by a fire which occurred in 1995. The Company
no longer participates in this pool. 2003 Compared with 2002 Revenues decreased $223 million in 2003 as compared with 2002. The decrease in revenues was due
primarily to reduced revenues from CNA UniSource and reduced net earned premiums in CNA Re due to
the decision in October of 2003 to exit the assumed reinsurance market. These unfavorable impacts
to revenue were partially offset by increased realized investment gains and increased limited
partnership income. Net results declined $761 million in 2003 as compared with 2002. The decrease in net results was
due primarily to a $624 million after-tax ($960 million pretax) increase in unfavorable net prior
year development primarily regarding APMT, a $44 million after-tax ($67 million pretax) increase in
ULAE reserves, a $12 million after-tax ($18 million pretax) increase in certain insurance related
assessments, a $153 million after-tax ($236 million pretax) increase in the bad debt provision for
reinsurance receivables, decreased net investment income due primarily to a reduction of invested
assets resulting from the sale of CNA Re U.K. and increased interest expense of $8 million
after-tax ($12 million pretax) related to additional cessions to the corporate aggregate
reinsurance treaties. The 2003 net results were favorably impacted by increased net realized
investment gains of $15 million after-tax ($45 million pretax) and the absences of $40 million
after-tax ($62 million pretax) of eBusiness expenses and an $18 million after-tax ($27 million
pretax) reduction of the accrual for restructuring and other related charges. See the Investments
section of this MD&A for further discussion on net investment income and net realized gains
(losses). Unfavorable net prior year development of $1,074 million was recorded in 2003, including $1,048
million of unfavorable claim and allocated claim adjustment expense reserve development and $26
million of unfavorable premium development. Unfavorable net prior year development of $114
million, including $155 million of unfavorable claim and allocated claim adjustment expense reserve
development, and $41 million of favorable premium development, was recorded in 2002. The discussion of the net prior year development recorded in 2003 was included in the 2004
compared with 2003 section above. The following discusses net prior year development recorded in 2002 for Corporate and Other
Non-Core. The development recorded in 2002 consisted primarily of CNA Re unfavorable net prior year
development. 51




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The unfavorable net prior
year development recorded in 2002 related primarily to CNA Re and was
the result of an actuarial review completed during 2002 and was primarily recorded in the directors
and officers, professional liability errors and omissions and surety lines of business. Several
large losses, as well as continued increases in the overall average size of claims for these lines,
have resulted in higher than expected loss ratios. Additionally, during 2002, CNA Re revised its estimate of premiums and losses related to the WTC
event. In estimating CNA Res WTC event losses, the Company performed a treaty-by-treaty analysis
of exposure. The Companys original loss estimate was based on a number of assumptions including
the loss to the industry, the loss to individual lines of business and the market share of CNA Res
cedants. Information that became available in the first quarter of 2002 resulted in CNA Re
increasing its estimate of WTC event related premiums and losses on its property facultative and
property catastrophe business. The impact of increasing the estimate of gross WTC event losses by
$144 million was fully offset on a net of reinsurance basis (before the impact of the CCC Cover) by
higher reinstatement premiums and a reduction of return premiums. Approximately $95 million of CNA
Res net WTC loss estimate was attributable to CNA Re U.K., which was sold in 2002. A $32 million underwriting benefit was recorded for CNA Re for the corporate aggregate reinsurance
treaties in 2002. The benefit was comprised of $93 million of ceded losses and $61 million of
ceded premiums for accident year 2001. Many ceding companies have sought provisions for the collateralization of assumed reserves in the
event of a financial strength ratings downgrade or other triggers. Before exiting the reinsurance
market, CNA Re had been impacted by this trend and had entered into several contracts with rating
or other triggers. See the Ratings section of this MD&A for more information. Additionally, personal insurance unfavorable net prior year development of $35 million was recorded
in 2002 on accident years 1997 through 1999. The unfavorable net prior year development was
principally due to the then continuing policyholder defense costs associated with remaining open
personal insurance claims. The unfavorable net prior year development was partially offset by
favorable reserve development on other run-off business driven principally by financial and
mortgage guarantee coverages from accident years 1997 and prior. The favorable net prior year
development on financial and mortgage guarantee coverages resulted from a review of the underlying
exposures and the outstanding losses, which showed that salvage and subrogation continues to be
collected on these types of claims, thereby reducing estimated future losses net of anticipated
reinsurance recoveries. APMT Reserves CNAs property and casualty insurance subsidiaries have actual and potential exposures related to
APMT claims. Establishing reserves for APMT claim and claim adjustment expenses is subject to uncertainties that
are greater than those presented by other claims. Traditional actuarial methods and techniques
employed to estimate the ultimate cost of claims for more traditional property and casualty
exposures are less precise in estimating claim and claim adjustment expense reserves for APMT,
particularly in an environment of emerging or potential claims and coverage issues that arise from
industry practices and legal, judicial, and social conditions. Therefore, these traditional
actuarial methods and techniques are necessarily supplemented with additional estimating techniques
and methodologies, many of which involve significant judgments that are required of management.
Accordingly, a high degree of uncertainty remains for the Companys ultimate liability for APMT
claim and claim adjustment expenses. In addition to the difficulties described above, estimating the ultimate cost of both reported and
unreported APMT claims is subject to a higher degree of variability due to a number of additional
factors, including among others: the number and outcome of direct actions against the Company;
coverage issues, including whether certain costs are covered under the policies and whether policy
limits apply; allocation of liability among numerous parties, some of whom may be in bankruptcy
proceedings, and in particular the application of joint and several liability to specific
insurers on a risk; inconsistent court decisions and developing legal theories; increasingly
aggressive tactics of plaintiffs lawyers; the risks and lack of predictability inherent in major
litigation; increased filings of claims in certain states; enactment of national federal
legislation to address asbestos claims; a future increase in asbestos and environmental pollution
claims which cannot now be anticipated; a future increase in number of mass tort claims 52




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relating to
silica and silica-containing products, and the outcome of ongoing disputes as to coverage in
relation to these claims; a further increase of claims and claims payments that may exhaust
underlying umbrella and excess coverages at accelerated rates; and future developments pertaining
to the Companys ability to recover reinsurance for asbestos and environmental pollution claims. CNA regularly performs ground up reviews of all open APMT accounts to evaluate the adequacy of the
Companys APMT reserves. In performing its comprehensive ground up analysis, the Company considers
input from its professionals with direct responsibility for the claims, inside and outside counsel
with responsibility for representation of the Company, and its actuarial staff. These
professionals review, among many factors, the policyholders present and predicted future
exposures, including such factors as claims volume, trial conditions, prior settlement history,
settlement demands and defense costs; the impact of asbestos defendant bankruptcies on the
policyholder; the policies issued by CNA, including such factors as aggregate or per occurrence
limits, whether the policy is primary, umbrella or excess and the existence of policyholder
retentions and/or deductibles; the existence of other insurance; and reinsurance arrangements. With respect to other court cases and how they might affect the Companys reserves and reasonable
possible losses, the following should be noted. State and federal courts issue numerous decisions
each year, which potentially impact losses and reserves in both a favorable and unfavorable manner.
Examples of favorable developments include decisions to allocate defense and indemnity payments in
a manner so as to limit carriers obligations to damages taking place during the effective dates of
their policies; decisions holding that injuries occurring after asbestos operations are completed
are subject to the completed operations aggregate limits of the policies; and decisions ruling that
carriers loss control inspections of their insureds premises do not give rise to a duty to warn
third parties to the dangers of asbestos. Examples of unfavorable developments include decisions limiting the application of the absolute
pollution exclusion and decisions holding carriers liable for defense and indemnity of asbestos and
pollution claims on a joint and several basis. The Companys ultimate liability for its environmental pollution and mass tort claims is impacted
by several factors including ongoing disputes with policyholders over scope and meaning of coverage
terms and, in the area of environmental pollution, court decisions that continue to restrict the
scope and applicability of the absolute pollution exclusion contained in policies issued by the
Company after 1989. Due to the inherent uncertainties described above, including the inconsistency
of court decisions, the number of waste sites subject to cleanup and in the area of environmental
pollution, the standards for cleanup and liability, the ultimate liability of CNA for environmental
pollution and mass tort claims may vary substantially from the amount currently recorded. Due to the inherent uncertainties in estimating reserves for APMT claim and claim adjustment
expenses and due to the significant uncertainties previously described related to APMT claims, the
ultimate liability for these cases, both individually and in aggregate, may exceed the recorded
reserves. Any such potential additional liability, or any range of potential additional amounts,
cannot be reasonably estimated currently, but could be material to the Companys business, results
of operations, equity, and insurer financial strength and debt ratings. Due to, among other
things, the factors described above, it may be necessary for the Company to record material changes
in its APMT claim and claim adjustment expense reserves in the future, should new information
become available or other developments emerge. 53




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The following table provides data related to CNAs APMT claim and claim adjustment expense
reserves. Asbestos and Environmental Pollution and Mass Tort Reserves December 31, 2004
    
    December 31, 2003Environmental
    
    
    
    
    
    EnvironmentalPollution and
    
    
    
    
    
    Pollution and(In millions)
    
    Asbestos
    
    Mass Tort
    
    Asbestos
    
    Mass TortGross reserves
    
    $
    3,218
    
    
    $
    755
    
    
    $
    3,347
    
    
    $
    839Ceded reserves
    
    
    (1,532
    )
    
    
    (258
    )
    
    
    (1,580
    )
    
    
    (262
    )Net reserves
    
    $
    1,686
    
    
    $
    497
    
    
    $
    1,767
    
    
    $
    577
 Asbestos CNAs property and casualty insurance subsidiaries have exposure to asbestos-related claims.
Estimation of asbestos-related claim and claim adjustment expense reserves involves limitations
such as inconsistency of court decisions, specific policy provisions, allocation of liability among
insurers and insureds and additional factors such as missing policies and proof of coverage.
Furthermore, estimation of asbestos-related claims is difficult due to, among other reasons, the
proliferation of bankruptcy proceedings and attendant uncertainties, the targeting of a broader
range of businesses and entities as defendants, the uncertainty as to which other insureds may be
targeted in the future and the uncertainties inherent in predicting the number of future claims. In the past several years, CNA has experienced, at certain points in time, significant increases in
claim counts for asbestos-related claims. The factors that led to these increases included, among
other things, intensive advertising campaigns by lawyers for asbestos claimants, mass medical
screening programs sponsored by plaintiff lawyers and the addition of new defendants such as the
distributors and installers of products containing asbestos. During 2004 the rate of new filings
appears to have decreased from the filing rates seen in the past several years. Various challenges
to mass screening claimants have been mounted. Nevertheless, the Company continues to experience
an overall increase in total asbestos claim counts. The majority of asbestos bodily injury claims
are filed by persons exhibiting few, if any, disease symptoms. Recent studies have concluded that
the percentage of unimpaired claimants to total claimants ranges between 66% and up to 90%. Some
courts, including the federal district court responsible for pre-trial proceedings in all federal
asbestos bodily injury actions, have ordered that so-called unimpaired claimants may not recover
unless at some point the claimants condition worsens to the point of impairment. Several factors are, in managements view, negatively impacting asbestos claim trends. Plaintiff
attorneys who previously sued entities who are now bankrupt are seeking other viable targets. As a
result, companies with few or no previous asbestos claims are becoming targets in asbestos
litigation and, although they may have little or no liability, nevertheless must be defended.
Additionally, plaintiff attorneys and trustees for future claimants are demanding that policy
limits be paid lump-sum into the bankruptcy asbestos trusts prior to presentation of valid claims
and medical proof of these claims. Various challenges to these practices are currently in
litigation and the ultimate impact or success of these tactics remains uncertain. Plaintiff
attorneys and trustees for future claimants are also attempting to devise claims payment procedures
for bankruptcy trusts that would allow asbestos claims to be paid under lax standards for injury,
exposure and causation. This also presents the potential for exhausting policy limits in an
accelerated fashion. As a result of bankruptcies and insolvencies, management has observed an increase in the total
number of policyholders with current asbestos claims as additional defendants are added to existing
lawsuits and are named in new asbestos bodily injury lawsuits. New asbestos bodily injury claims
have also increased substantially in 2003, but the rate of increase has moderated in 2004. As of December 31, 2004 and 2003, CNA carried approximately $1,686 million and $1,767 million of
claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and
unreported asbestos-related claims. The Company recorded $54 million and $642 million of
unfavorable asbestos-related net claim and claim adjustment expense reserve development for the
years ended December 31, 2004 and 2003. The Company recorded 54




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no asbestos related net claim and
claim adjustment expense reserve development for the year ended December 31, 2002. The 2004
unfavorable net prior year development was primarily related to a commutation loss related to
Trenwick. The Company paid asbestos-related claims, net of reinsurance recoveries, of $135
million, $121 million and $21 million for the years ended December 31, 2004, 2003 and 2002. The Company recorded $1,826 million and $642 million in unfavorable gross and net
prior year development for the
year ended December 31, 2003 for reported and unreported asbestos-related claims, principally due to potential
losses from policies issued by the Company with high attachment points, which previous exposure analysis
indicated would not be reached. The Company examined the claims filing trends to determine timeframes within
which high excess policies issued by the Company could be reached. Elevated claims volumes and increased claims
values, together with certain adverse court decisions affecting the ability of policyholders to access excess policies,
supported the conclusion that excess policies with high attachment points previously thought not to be exposed may
now potentially be exposed. The ceded reinsurance arrangements on these excess policies are different from the
primary policies. In general, more extensive reinsurance arrangements apply to the excess policies. As a result, the prior year development
shows a higher ratio of ceded to gross amounts than the reserves established in prior periods, resulting in a higher
percentage of reserves ceded as of December 31, 2003 versus prior periods. The Company has resolved a number of its large asbestos accounts by negotiating settlement
agreements. Structured settlement agreements provide for payments over multiple years as set forth
in each individual agreement. At December 31, 2004, CNA had eleven structured settlement
agreements with a reserve net of reinsurance of $175 million. As to the eleven structured
settlement agreements existing at December 31, 2004, payment obligations under those settlement
agreements are projected to terminate by 2016. At December 31, 2003, CNA had structured settlement
agreements with nine of its policyholders for which it had future payment obligations with a
reserve, net of reinsurance, of $188 million. In 1985, 47 asbestos producers and their insurers, including CIC, executed the Wellington
Agreement. The agreement intended to resolve all issues and litigation related to coverage for
asbestos exposures. Under this agreement, signatory insurers committed scheduled policy limits and
made the limits available to pay asbestos claims based upon coverage blocks designated by the
policyholders in 1985, subject to extension by policyholders. CIC was a signatory insurer to the
Wellington Agreement. At December 31, 2004, CNA had obligations for four accounts. With respect to
these four remaining unpaid Wellington obligations, CNA has evaluated its exposure and the expected
reinsurance recoveries under these agreements and has a recorded reserve of $17 million, net of
reinsurance. At December 31, 2003, CNA had fulfilled its Wellington Agreement obligations as to
all but five accounts and had a recorded reserve of $23 million, net of reinsurance. CNA has also used coverage in place agreements to resolve large asbestos exposures. Coverage in
place agreements are typically agreements between CNA and its policyholders identifying the
policies and the terms for payment of asbestos related liabilities. Claims payments are contingent
on presentation of adequate documentation showing exposure during the policy periods and other
documentation supporting the demand for claims payment. Coverage in place agreements may have
annual payment caps. Coverage in place agreements are evaluated based on claims filings trends and
severities. As of December 31, 2004, CNA had negotiated thirty-three coverage in place agreements.
The Company has evaluated these commitments and the expected reinsurance recoveries under these
agreements and has recorded a reserve of $76 million, net of reinsurance as of December 31, 2004.
As of December 31, 2003, CNA had negotiated thirty-two such agreements and had established a
reserve of $109 million, net of reinsurance. The Company categorizes active asbestos accounts as large or small accounts. CNA defines a large
account as an active account with more than $100,000 of cumulative paid losses. The Company has
made closing large accounts a significant management priority. At December 31, 2004, the Company
had 180 large accounts and had established reserves of $368 million, net of reinsurance. At
December 31, 2003, CNA had 160 large accounts with reserves of $405 million, net of reinsurance.
Large accounts are typically accounts that have been long identified as significant asbestos
exposures. In the 2003 ground up reserve study, the Company observed that underlying layers of
primary, umbrella and lower layer excess policies were exhausting at accelerated rates due to
increased claims volumes, claims severities and increased defense expense incurred in litigating
claims. Those accounts where the Company had issued high excess policies were evaluated in the
study to determine potential impairment of the high excess layers of coverage. Management
concluded that high excess coverage previously thought not to be exposed could potentially be
exposed should current adverse claim trends continue. Small accounts are defined as active accounts with $100,000 or less cumulative paid losses. At
December 31, 2004, the Company had 1,109 small accounts, approximately 83% of its total active
asbestos accounts, with reserves of $141 million, net of reinsurance. At December 31, 2003, CNA
had 1,065 small accounts and established reserves of
$147 million, net of reinsurance. Small accounts are typically representative of policyholders
with limited connection to asbestos. As entities which were historic targets in asbestos
litigation continue to file for bankruptcy protection, plaintiffs attorneys are seeking other
viable targets. As a result, companies with few or no previous asbestos claims are becoming targets
in asbestos litigation and nevertheless must be defended by CNA under its 55




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policies. Bankruptcy
filings and increased claims filings in the last few years could potentially increase costs
incurred in defending small accounts. The Company also evaluates its asbestos liabilities arising from its assumed reinsurance business
and its participation in various pools. At December 31, 2004 and 2003, CNA had $148 million and
$157 million of reserves, net of reinsurance, related to these asbestos liabilities arising from
the Companys assumed reinsurance obligations and CNAs participation in pools, including Excess &
Casualty Reinsurance Association (ECRA). At December 31, 2004 and 2003, the unassigned IBNR reserve was $707 million and $684 million, net of
reinsurance. This IBNR reserve relates to potential development on accounts that have not settled
and potential future claims from unidentified policyholders. The tables below depict CNAs overall pending asbestos accounts and associated reserves at December
31, 2004 and December 31, 2003. Pending Asbestos Accounts and Associated Reserves December 31, 2004 Net Paid Losses
    
    Net Asbestos
    
    Percent ofNumber of
    
    in 2004
    
    Reserves
    
    AsbestosPolicyholders
    
    (In millions)
    
    (In millions)
    
    Net ReservesPolicyholders with settlement agreementsStructured Settlements
    
    
    11
    
    
    $
    39
    
    
    $
    175
    
    
    
    10
    %Wellington
    
    
    4
    
    
    
    4
    
    
    
    17
    
    
    
    1Coverage in place
    
    
    33
    
    
    
    14
    
    
    
    76
    
    
    
    5Fibreboard
    
    
    1
    
    
    
    
    
    
    
    54
    
    
    
    3Total with settlement agreements
    
    
    49
    
    
    
    57
    
    
    
    322
    
    
    
    19Other policyholders with active accountsLarge asbestos accounts
    
    
    180
    
    
    
    47
    
    
    
    368
    
    
    
    22Small asbestos accounts
    
    
    1,109
    
    
    
    23
    
    
    
    141
    
    
    
    8Total other policyholders
    
    
    1,289
    
    
    
    70
    
    
    
    509
    
    
    
    30Assumed reinsurance and pools
    
    
    
    
    
    
    8
    
    
    
    148
    
    
    
    9Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    707
    
    
    
    42Total
    
    
    1,338
    
    
    $
    135
    
    
    $
    1,686
    
    
    
    100
    %
 56




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Pending Asbestos Accounts and Associated Reserves December 31, 2003 Net Paid Losses
    
    Net Asbestos
    
    Percent ofNumber of
    
    in 2003
    
    Reserves
    
    AsbestosPolicyholders
    
    (In millions)
    
    (In millions)
    
    Net ReservesPolicyholders with settlement agreementsStructured Settlements
    
    
    9
    
    
    $
    20
    
    
    $
    188
    
    
    
    11
    %Wellington
    
    
    5
    
    
    
    2
    
    
    
    23
    
    
    
    1Coverage in place
    
    
    32
    
    
    
    40
    
    
    
    109
    
    
    
    6Fibreboard
    
    
    1
    
    
    
    1
    
    
    
    54
    
    
    
    3Total with settlement agreements
    
    
    47
    
    
    
    63
    
    
    
    374
    
    
    
    21Other policyholders with active accountsLarge asbestos accounts
    
    
    160
    
    
    
    35
    
    
    
    405
    
    
    
    23Small asbestos accounts
    
    
    1,065
    
    
    
    16
    
    
    
    147
    
    
    
    8Total other policyholders
    
    
    1,225
    
    
    
    51
    
    
    
    552
    
    
    
    31Assumed reinsurance and pools
    
    
    
    
    
    
    7
    
    
    
    157
    
    
    
    9Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    684
    
    
    
    39Total
    
    
    1,272
    
    
    $
    121
    
    
    $
    1,767
    
    
    
    100
    %
 Some asbestos-related
defendants have asserted that their insurance policies are not subject
to aggregate limits on coverage. CNA has such claims from a number of insureds. Some of these
claims involve insureds facing exhaustion of products liability aggregate limits in their policies,
who have asserted that their asbestos-related claims fall within so-called non-products liability
coverage contained within their policies rather than products liability coverage, and that the
claimed non-products coverage is not subject to any aggregate limit. It is difficult to predict
the ultimate size of any of the claims for coverage purportedly not subject to aggregate limits or
predict to what extent, if any, the attempts to assert non-products claims outside the products
liability aggregate will succeed. The Companys policies also contain other limits applicable to
these claims, and the Company has additional coverage defenses to certain claims. The Company has
attempted to manage its asbestos exposure by aggressively seeking to settle claims on acceptable
terms. There can be no assurance that any of these settlement efforts will be successful, or that
any such claims can be settled on terms acceptable to CNA. Where CNA cannot settle a claim on
acceptable terms, the Company aggressively litigates the claim. A recent court ruling by the
United States Court of Appeals for the Fourth Circuit has supported certain of the Companys
positions with respect to coverage for non-products claims. However, adverse developments with
respect to such matters could have a material adverse effect on CNAs results of operations and/or
equity. Certain asbestos litigation in which CNA is currently engaged is described below: As more fully discussed in Note F of the Consolidated Financial Statements included under Item 8
under the heading APMT Reserves and in this MD&A under the headings Asbestos and
ReservesEstimates and Uncertainties, the ultimate cost of reported claims, and in particular
APMT claims, is subject to a great many uncertainties, including future developments of various
kinds that CNA does not control and that are difficult or impossible to foresee accurately. With
respect to the litigation identified below in particular, numerous factual and legal issues remain
unresolved. Rulings on those issues by the courts are critical to the evaluation of the ultimate
cost to the Company. The outcome of the litigation cannot be predicted with any reliability.
Accordingly, the extent of losses beyond any amounts that may be accrued are not readily
determinable at this time. On February 13, 2003, CNA announced it had resolved asbestos related coverage litigation and claims
involving A.P. Green Industries, A.P. Green Services and Bigelow  Liptak Corporation. Under the
agreement, CNA is required to pay $74 million, net of reinsurance recoveries, over a ten year
period commencing after the final approval of a bankruptcy plan of reorganization. The settlement
resolves CNAs liabilities for all pending and 57




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future asbestos claims involving A.P. Green
Industries, Bigelow  Liptak Corporation and related subsidiaries, including alleged non-products
exposures. The settlement received initial bankruptcy court approval on August 18, 2003 and CNA
expects to procure confirmation of a bankruptcy plan containing an injunction to protect CNA from
any future claims. CNA is engaged in insurance coverage litigation, filed in 2003, with underlying plaintiffs who have
asbestos bodily injury claims against the former Robert A. Keasbey Company (Keasbey) in New York
state court (Continental Casualty Co. v. Employers Ins. of Wausau et al., No. 601037/03
(N.Y. County)). Keasbey, a currently dissolved corporation, was a seller and installer of
asbestos-containing insulation products in New York and New Jersey. Thousands of plaintiffs have
filed bodily injury claims against Keasbey; however, Keasbeys involvement at a number of work
sites is a highly contested issue. Therefore, the defense disputes the percentage of valid claims
against Keasbey. CNA issued Keasbey primary policies for 1970-1987 and excess policies for
1972-1978. CNA has paid an amount substantially equal to the policies aggregate limits for
products and completed operations claims. Claimants against Keasbey allege, among other things,
that CNA owes coverage under sections of the policies not subject to the aggregate limits, an
allegation CNA vigorously contests in the lawsuit. In the litigation, CNA and the claimants seek
declaratory relief as to the interpretation of various policy provisions. The court dismissed a
claim alleging bad faith and seeking unspecified damages on March 21, 2004; that ruling is now
being appealed. With respect to this litigation in particular, numerous factual and legal issues
remain to be resolved that are critical to the final result, the outcome of which cannot be
predicted with any reliability. These factors include, among others: (a) whether the Company has
any further responsibility to compensate claimants against Keasbey under its policies and, if so,
under which policies; (b) whether the Companys responsibilities extend to a particular claimants
entire claim or only to a limited percentage of the claim; (c) whether the Companys
responsibilities under its policies are limited by the occurrence limits or other provisions of the
policies; (d) whether certain exclusions in some of the policies apply to exclude certain claims;
(e) the extent to which claimants can establish exposures to asbestos materials as to which Keasbey
has any responsibility; (f) the legal theories which must be pursued by such claimants to establish
the liability of Keasbey and whether such theories can, in fact, be established; (g) the diseases
and damages claimed by such claimants; (h) and the extent that such liability would be shared with
other responsible parties. Accordingly, the extent of losses beyond any amounts that may be accrued
are not readily determinable at this time. CNA has insurance coverage disputes related to asbestos bodily injury claims against Burns & Roe
Enterprises, Inc. (Burns & Roe). Originally raised in litigation, now stayed, these disputes are
currently part of In re: Burns & Roe Enterprises, Inc., pending in the U.S. Bankruptcy
Court for the District of New Jersey, No. 00-41610. Burns & Roe provided engineering and related
services in connection with construction projects. At the time of its bankruptcy filing, on
December 4, 2000, Burns & Roe faced approximately 11,000 claims alleging bodily injury resulting
from exposure to asbestos as a result of construction projects in which Burns & Roe was involved.
CNA allegedly provided primary liability coverage to Burns & Roe from 1956-1969 and 1971-1974,
along with certain project-specific policies from 1964-1970. The parties in the litigation are
seeking a declaration of the scope and extent of coverage, if any, afforded to Burns & Roe for its
asbestos liabilities. The litigation has been stayed since May 14, 2003 pending resolution of the
bankruptcy proceedings. With respect to the Burns & Roe litigation and the pending bankruptcy
proceeding, numerous unresolved factual and legal issues will impact the ultimate exposure to the
Company. With respect to this litigation, numerous factual and legal issues remain to be resolved
that are critical to the final result, the outcome of which cannot be predicted with any
reliability. These factors include, among others: (a) whether the Company has any further
responsibility to compensate claimants against Burns & Roe under its policies and, if so, under
which; (b) whether the Companys responsibilities under its policies extend to a particular
claimants entire claim or only to a limited percentage of the claim; (c) whether the Companys
responsibilities under its policies are limited by the occurrence limits or other provisions of the
policies; (d) whether certain exclusions, including professional liability exclusions, in some of
the Companys policies apply to exclude certain claims; (e) the extent to which claimants can
establish exposures to asbestos materials as to which Burns & Roe has any responsibility; (f) the
legal theories which must be pursued by such claimants to establish the liability of Burns & Roe
and whether such theories can, in fact, be established; (g) the diseases and damages claimed by
such claimants; (h) the extent that any liability of Burns & Roe would be shared with other
potentially responsible parties;
(i) and the impact of bankruptcy proceedings on claims and coverage issue resolution. Accordingly,
the extent of losses beyond any amounts that may be accrued are not readily determinable at this
time. CIC issued certain primary and excess policies to Bendix Corporation (Bendix), now part of
Honeywell International, Inc. (Honeywell). Honeywell faces approximately 75,400 pending asbestos
bodily injury claims resulting from alleged 58




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exposure to Bendix friction products. CICs primary
policies allegedly covered the period from at least 1939 (when Bendix began to use asbestos in its
friction products) to 1983, although the parties disagree about whether CICs policies provided
product liability coverage before 1940 and from 1945 to 1956. CIC asserts that it owes no further
material obligations to Bendix under any primary policy. Honeywell alleges that two primary
policies issued by CIC covering 1969-1975 contain occurrence limits but not product liability
aggregate limits for asbestos bodily injury claims. CIC has asserted, among other things, even if
Honeywells allegation is correct, which CNA denies, its liability is limited to a single
occurrence limit per policy or per year, and in the alternative, a proper allocation of losses
would substantially limit its exposure under the 1969-1975 policies to asbestos claims. These and
other issues are being litigated in Continental Insurance Co., et al. v. Honeywell
International Inc., No. MRS-L-1523-00 (Morris County, New Jersey) which was filed on May 15,
2000. In the litigation, the parties are seeking declaratory relief of the scope and extent of
coverage, if any, afforded to Bendix under the policies issued by the Company. With respect to this
litigation, numerous factual and legal issues remain to be resolved that are critical to the final
result, the outcome of which cannot be predicted with any reliability. These factors include, among
others: (a) whether certain of the primary policies issued by the Company contain aggregate limits
of liability; (b) whether the Companys responsibilities under its policies extend to a particular
claimants entire claim or only to a limited percentage of the claim; (c) whether the Companys
responsibilities under its policies are limited by the occurrence limits or other provisions of the
policies; (d) whether some of the claims against Bendix arise out of events which took place after
expiration of the Companys policies; (e) the extent to which claimants can establish exposures to
asbestos materials as to which Bendix has any responsibility; (f) the legal theories which must be
pursued by such claimants to establish the liability of Bendix and whether such theories can, in
fact, be established; (g) the diseases and damages claimed by such claimants; (h) the extent that
any liability of Bendix would be shared with other responsible parties; and (i) whether Bendix is
responsible for reimbursement of funds advanced by the Company for defense and indemnity in the
past. Accordingly, the extent of losses beyond any amounts that may be accrued are not readily
determinable at this time. Suits have also been initiated directly against CNA and other insurers
in four jurisdictions: Ohio, Texas, West Virginia and Montana. In the two Ohio actions, plaintiffs allege the defendants negligently performed duties undertaken
to protect workers and the public from the effects of asbestos (Varner v. Ford Motor Co., et
al. (Cuyahoga County, Ohio, filed on June 12, 2003) and Peplowski v. ACE American Ins. Co.,
et al. (U.S. D. C. N.D. Ohio, filed on April 1, 2004)). The state trial court granted
insurers, including CNA, summary judgment against a representative group of plaintiffs, ruling that
insurers had no duty to warn plaintiffs about the dangers of asbestos. The summary judgment ruling
is on appeal. With respect to this litigation in particular, numerous factual and legal issues
remain to be resolved that are critical to the final result, the outcome of which cannot be
predicted with any reliability. These factors include: (a) the speculative nature and unclear
scope of any alleged duties owed to individuals exposed to asbestos and the resulting uncertainty
as to the potential pool of potential claimants; (b) the fact that imposing such duties on all
insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal
boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to
date are barred by various Statutes of Limitation and it is unclear whether future claims would
also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and
the right of any particular claimant to recovery; (e) the existence of hundreds of co-defendants in
some of the suits and the applicability of the legal theories pled by the claimants to thousands of
potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are
not readily determinable at this time. Similar lawsuits have also been filed in Texas against CNA beginning in 2002, and other insurers
and non-insurer corporate defendants asserting liability for failing to warn of the dangers of
asbestos (Boson v. Union Carbide Corp., et al. (District Court of Nueces County, Texas)).
During 2003, many of the Texas claims have been dismissed as time-barred by the applicable Statute
of Limitations. In other claims, the Texas courts have ruled that the carriers did not owe any
duty to the plaintiffs or the general public to advise on the effects of asbestos thereby
dismissing these claims. Certain of the Texas courts rulings have been appealed. With respect to
this litigation in particular, numerous factual and legal issues remain to be resolved that are
critical to the final result, the outcome of which cannot be predicted with any reliability. These
factors include: (a) the speculative nature and unclear scope of any alleged duties owed to
individuals exposed to asbestos and the resulting uncertainty as to the potential pool of
potential claimants; (b) the fact that imposing such duties on all insurer and non-insurer
corporate defendants would be unprecedented and, therefore, the legal boundaries of recovery are
difficult to estimate; (c) the fact that many of the claims brought to date are barred by various
Statutes of Limitation and it is unclear whether future claims would also be barred; (d) the
unclear nature of the required nexus between the acts of the defendants and the right of any 59




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particular claimant to recovery; (e) the existence of hundreds of co-defendants in some of the
suits and the applicability of the legal theories pled by the claimants to thousands of potential
defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not
readily determinable at this time. CNA was named in Adams v. Aetna, Inc., et al. (Circuit Court of Kanawha County, West
Virginia, filed June 23, 2002), a purported class action against CNA and other insurers, alleging
that the defendants violated West Virginias Unfair Trade Practices Act in handling and resolving
asbestos claims against their policyholders. The Adams litigation had been stayed pending
disposition of two cases in the West Virginia Supreme Court of Appeals. Those cases were decided
in June, 2004. The Adams case also involves proceedings and mediation in the Bankruptcy Court in
New York with jurisdiction over the Manville Bankruptcy. In those proceedings issues have been
raised concerning the preclusive effect of the Manville Bankruptcy settlements with insurers and
resulting injunctions against claims. Those issues are now on appeal to the United States District
Court for the Eastern District of New York. With respect to this litigation in particular,
numerous factual and legal issues remain to be resolved that are critical to the final result, the
outcome of which cannot be predicted with any reliability. These factors include: (a) the legal
sufficiency of the novel statutory and common law claims pled by the claimants; (b) the
applicability of claimants legal theories to insurers who neither defended nor controlled the
defense of certain policyholders; (c) the possibility that certain of the claims are barred by
various Statutes of Limitation; (d) the fact that the imposition of duties would interfere with the
attorney client privilege and the contractual rights and responsibilities of the parties to the
Companys insurance policies; (e) the potential and relative magnitude of liabilities of
co-defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are not
readily determinable at this time. On March 22, 2002, a direct action was filed in Montana (Pennock, et al. v. Maryland Casualty,
et al. First Judicial District Court of Lewis & Clark County, Montana) by eight individual
plaintiffs (all employees of W.R. Grace & Co. (W.R. Grace)) and their spouses against CNA, Maryland
Casualty and the State of Montana. This action alleges that the carriers failed to warn of or
otherwise protect W.R. Grace employees from the dangers of asbestos at a W.R. Grace vermiculite
mining facility in Libby, Montana. The Montana direct action is currently stayed because of W.R.
Graces pending bankruptcy. With respect to this litigation in particular, numerous factual and
legal issues remain to be resolved that are critical to the final result, the outcome of which
cannot be predicted with any reliability. These factors include: (a) the unclear nature and scope
of any alleged duties owed to people exposed to asbestos and the resulting uncertainty as to the
potential pool of potential claimants; (b) the potential application of Statutes of Limitation
to many of the claims which may be made depending on the nature and scope of the alleged duties;
(c) the unclear nature of the required nexus between the acts of the defendants and the right of
any particular claimant to recovery; (d) the diseases and damages claimed by such claimants; (e)
and the extent that such liability would be shared with other potentially responsible parties; and,
(f) the impact of bankruptcy proceedings on claims resolution. Accordingly, the extent of losses
beyond any amounts that may be accrued are not readily determinable at this time. CNA is vigorously defending these and other cases and believes that it has meritorious defenses to
the claims asserted. However, there are numerous factual and legal issues to be resolved in
connection with these claims, and it is extremely difficult to predict the outcome or ultimate
financial exposure represented by these matters. Adverse developments with respect to any of these
matters could have a material adverse effect on CNAs business, insurer financial strength and debt
ratings and results of operations and/or equity. As a result of the uncertainties and complexities involved, reserves for asbestos claims cannot be
estimated with traditional actuarial techniques that rely on historical accident year loss
development factors. In establishing asbestos reserves, CNA evaluates the exposure presented by
each insured. As part of this evaluation, CNA considers the available insurance coverage; limits
and deductibles; the potential role of other insurance, particularly underlying coverage below any
CNA excess liability policies; and applicable coverage defenses, including asbestos exclusions.
Estimation of asbestos-related claim and claim adjustment expense reserves involves a high degree
of judgment on the part of management and consideration of many complex factors, including:  
    inconsistency of court decisions, jury attitudes and future court decisions
    specific policy provisions 60




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
    allocation of liability among insurers and insureds
    missing policies and proof of coverage
    the proliferation of bankruptcy proceedings and attendant uncertainties
    novel theories asserted by policyholders and their counsel
    the targeting of a broader range of businesses and entities as defendants
    the uncertainty as to which other insureds may be targeted in the future and the
uncertainties inherent in predicting the number of future claims
    volatility in claim numbers and settlement demands
    increases in the number of non-impaired claimants and the extent to which they can be
precluded from making claims
    the efforts by insureds to obtain coverage not subject to aggregate limits
    long latency period between asbestos exposure and disease manifestation and the
resulting potential for involvement of multiple policy periods for individual claims
    medical inflation trends
    the mix of asbestos-related diseases presented and
    the ability to recover reinsurance. The Company is also monitoring possible legislative reforms on the state and national level,
including possible federal legislation to create a national privately financed trust financed by
contributions from insurers such as CNA, industrial companies and others, which if established,
could replace litigation of asbestos claims with payments to claimants from the trust. It is
uncertain at the present time whether such legislation will be enacted or, if it is, its impact on
the Company. Environmental Pollution and Mass Tort Environmental pollution cleanup is the subject of both federal and state regulation. By some
estimates, there are thousands of potential waste sites subject to cleanup. The insurance industry
is involved in extensive litigation regarding coverage issues. Judicial interpretations in many
cases have expanded the scope of coverage and liability beyond the original intent of the policies.
The Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund) and
comparable state statutes (mini-Superfunds) govern the cleanup and restoration of toxic waste sites
and formalize the concept of legal liability for cleanup and restoration by Potentially
Responsible Parties (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for
cleanup of waste sites if PRPs fail to do so and assign liability to PRPs. The extent of liability
to be allocated to a PRP is dependent upon a variety of factors. Further, the number of waste
sites subject to cleanup is unknown. To date, approximately 1,500 cleanup sites have been
identified by the Environmental Protection Agency (EPA) and included on its National Priorities
List (NPL). State authorities have designated many cleanup sites as well. Many policyholders have made claims against various CNA insurance subsidiaries for defense costs
and indemnification in connection with environmental pollution matters. The vast majority of these
claims relate to accident years 1989 and prior, which coincides with CNAs adoption of the
Simplified Commercial General
Liability coverage form, which includes what is referred to in the industry as an absolute
pollution exclusion. CNA and the insurance industry are disputing coverage for many such claims.
Key coverage issues include whether 61




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cleanup costs are considered damages under the policies,
trigger of coverage, allocation of liability among triggered policies, applicability of pollution
exclusions and owned property exclusions, the potential for joint and several liability and the
definition of an occurrence. To date, courts have been inconsistent in their rulings on these
issues. A number of proposals to modify Superfund have been made by various parties. However, no
modifications were enacted by Congress during 2004 or 2003, and it is unclear what positions
Congress or the Administration will take and what legislation, if any, will result in the future.
If there is legislation, and in some circumstances even if there is no legislation, the federal
role in environmental cleanup may be significantly reduced in favor of state action. Substantial
changes in the federal statute or the activity of the EPA may cause states to reconsider their
environmental cleanup statutes and regulations. There can be no meaningful prediction of the
pattern of regulation that would result or the possible effect upon CNAs results of operations or
equity. As of December 31, 2004 and 2003, CNA carried approximately $497 million and $577 million of claim
and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported
environmental pollution and mass tort claims. There was $1 million and $153 million of
environmental pollution and mass tort net claim and claim adjustment expense reserve development
recorded for the years ended December 31, 2004 and 2003. There was no environmental pollution and
mass tort net claim and claim adjustment expense reserve development recorded for the year ended
December 31, 2002. Additionally, the Company recorded $15 million of current accident year losses
related to mass tort in 2004. The Company paid environmental pollution-related claims and mass
tort-related claims, net of reinsurance recoveries, of $96 million, $93 million and $116 million
for the years ended December 31, 2004, 2003 and 2002. CNA has made resolution of large environmental pollution exposures a management priority. The
Company has resolved a number of its large environmental accounts by negotiating settlement
agreements. In its settlements, CNA sought to resolve those exposures and obtain the broadest
release language to avoid future claims from the same policyholders seeking coverage for sites or
claims that had not emerged at the time CNA settled with its policyholder. While the terms of each
settlement agreement vary, CNA sought to obtain broad environmental releases that include known and
unknown sites, claims and policies. The broad scope of the release provisions contained in those
settlement agreements should, in many cases, prevent future exposure from settled policyholders.
It remains uncertain, however, whether a court interpreting the language of the settlement
agreements will adhere to the intent of the parties and uphold the broad scope of language of the
agreements. The Company classifies its environmental pollution accounts into several categories, which include
structured settlements, coverage in place agreements and active accounts. Structured settlement
agreements provide for payments over multiple years as set forth in each individual agreement. At
December 31, 2004, CNA had two structured settlement agreements and has established reserves of $5
million, net of reinsurance, to fund future payment obligations under the agreements. At December
31, 2003, CNA had a structured settlement agreement with one of its policyholders for which it had
future payment obligations with a recorded reserve of $12 million, net of reinsurance. CNA has also used coverage in place agreements to resolve pollution exposures. Coverage in place
agreements are typically agreements between CNA and its policyholders identifying the policies and
the terms for payment of pollution related liabilities. Claims payments are contingent on
presentation of adequate documentation of damages 62




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during the policy periods and other documentation
supporting the demand for claims payment. Coverage in place agreements may have annual payment
caps. At December 31, 2004, CNA had negotiated fifteen coverage in place agreements and had
established a reserve of $16 million, net of reinsurance. At December 31, 2003, CNA had six such
agreements with a recorded reserve of $8 million, net of reinsurance. The Company categorizes active accounts as large or small accounts in the pollution area. CNA
defines a large account as an active account with more than $100,000 cumulative paid losses. At
December 31, 2004, the Company had 134 large accounts with a collective reserve of $75 million, net
of reinsurance. The Company has made closing large accounts a significant management priority.
CNA had 144 large accounts with a collective reserve of $86 million, net of reinsurance, at
December 31, 2003. Small accounts are defined as active accounts with $100,000 or less cumulative
paid losses. At December 31, 2004, CNA had 405 small accounts with a collective reserve of $47
million, net of reinsurance. CNA had 432 small accounts with a collective reserve of $53 million,
net of reinsurance, at December 31, 2003. The Company also evaluates its environmental pollution exposures arising from its assumed
reinsurance and its participation in various pools, including ECRA. CNA has a reserve of $36
million and $38 million related to these liabilities for the years ended December 31, 2004 and
2003. At December 31, 2004, the Companys unassigned IBNR reserve was $163 million, net of reinsurance.
At December 31, 2003, CNAs unassigned IBNR reserve for environmental pollution was $197 million,
net of reinsurance. This IBNR reserve relates to potential development on accounts that have not
settled and potential future claims from unidentified policyholders. The charts below depict CNAs overall pending environmental pollution accounts and associated
reserves at December 31, 2004 and 2003. At December 31, 2004 NetEnvironmental
    
    Percent ofNet Paid Losses
    
    Pollution
    
    EnvironmentalNumber of
    
    in 2004
    
    Reserves
    
    Pollution NetPolicyholders
    
    (In millions)
    
    (In millions)
    
    ReservePolicyholders with Settlement AgreementsStructured settlements
    
    
    2
    
    
    $
    14
    
    
    $
    5
    
    
    
    1
    %Coverage in place
    
    
    15
    
    
    
    5
    
    
    
    16
    
    
    
    5Total with Settlement Agreements
    
    
    17
    
    
    
    19
    
    
    
    21
    
    
    
    6Other Policyholders with Active AccountsLarge pollution accounts
    
    
    134
    
    
    
    18
    
    
    
    75
    
    
    
    22Small pollution accounts
    
    
    405
    
    
    
    14
    
    
    
    47
    
    
    
    14Total Other Policyholders
    
    
    539
    
    
    
    32
    
    
    
    122
    
    
    
    36Assumed Reinsurance & Pools
    
    
    
    
    
    
    2
    
    
    
    36
    
    
    
    10Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    163
    
    
    
    48Total
    
    
    556
    
    
    $
    53
    
    
    $
    342
    
    
    
    100
    %
 63




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At December 31, 2003 NetEnvironmental
    
    Percent ofNet Paid Losses
    
    Pollution
    
    EnvironmentalNumber of
    
    in 2003
    
    Reserves
    
    Pollution NetPolicyholders
    
    (In millions)
    
    (In millions)
    
    ReservePolicyholders with Settlement AgreementsStructured settlements
    
    
    1
    
    
    $
    17
    
    
    $
    12
    
    
    
    3
    %Coverage in place
    
    
    6
    
    
    
    3
    
    
    
    8
    
    
    
    2Total with Settlement Agreements
    
    
    7
    
    
    
    20
    
    
    
    20
    
    
    
    5Other Policyholders with Active AccountsLarge pollution accounts
    
    
    144
    
    
    
    21
    
    
    
    86
    
    
    
    22Small pollution accounts
    
    
    432
    
    
    
    14
    
    
    
    53
    
    
    
    13Total Other Policyholders
    
    
    576
    
    
    
    35
    
    
    
    139
    
    
    
    35Assumed Reinsurance & Pools
    
    
    
    
    
    
    2
    
    
    
    38
    
    
    
    10Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    50Total
    
    
    583
    
    
    $
    57
    
    
    $
    394
    
    
    
    100
    %
 In 2003, CNA observed a marked increase in silica claims frequency in Mississippi, where plaintiff
attorneys appear to have filed claims to avoid the effect of tort reform. In 2004, silica claims
frequency in Mississippi has moderated notably due to implementation of tort reform measures and
favorable court decisions. To date, the most significant silica exposures identified included a
relatively small number of accounts with significant numbers of new claims reported in 2003 that
continued at a lesser rate in 2004. Establishing claim and claim adjustment expense reserves for
silica claims is subject to uncertainties because of disputes concerning medical causation with
respect to certain diseases, including lung cancer, geographical concentration of the lawsuits
asserting the claims, and the large rise in the total number of claims without underlying
epidemiological developments suggesting an increase in disease rates or plaintiffs. Moreover,
judicial interpretations regarding application of various tort defenses, including application of
various theories of joint and several liabilities, impede the Companys ability to estimate its
ultimate liability for such claims. 64




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INVESTMENTS CNA adopted Statement of Position 03-01, Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-01) as of
January 1, 2004. The assets and liabilities of certain guaranteed investment contracts and indexed
group annuity contracts that were previously segregated and reported as separate accounts no longer
qualify for separate account presentation. Prior to the adoption of SOP 03-01, the asset and
liability presentation of these affected contracts were categorized as separate account assets and
liabilities within the Consolidated Balance Sheet. The results of operations from separate
account business were primarily classified as other revenue in the Consolidated Statement of
Operations. In accordance with the provisions of SOP 03-01, the classification and presentation of
certain balance sheet and income statement items have been modified. Accordingly, certain
investment securities previously classified as separate account assets have now been reclassified
on the balance sheet to the general account and are reported as available-for-sale or trading
securities. The investment portfolio supporting the indexed group annuity contracts is classified
as held for trading purposes, and is carried at fair value, with both the net realized and
unrealized gains (losses) included within net investment income in the Consolidated Statement of
Operations. Consistent with the requirements of SOP 03-01, prior year amounts have not been
conformed to the current year presentation. Beginning in the fourth quarter of 2004, the Company has designated new purchases related to a
specific investment strategy, that primarily includes convertible bond securities, as held for
trading purposes. These securities in the trading portfolio are carried at fair value, with both
the net realized and unrealized gains (losses) included within net investment income in the
Consolidated Statements of Operations. Net Investment Income The significant components of net investment income are presented in the following table. Net Investment Income Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Fixed maturity securities
    
    $
    1,571
    
    
    $
    1,651
    
    
    $
    1,854Short term investments
    
    
    56
    
    
    
    63
    
    
    
    62Limited partnerships
    
    
    212
    
    
    
    221
    
    
    
    (34
    )Equity securities
    
    
    14
    
    
    
    19
    
    
    
    66Income from trading portfolio (a)
    
    
    110
    
    
    
    
    
    
    
    Interest on funds withheld and other deposits
    
    
    (267
    )
    
    
    (344
    )
    
    
    (239
    )Other
    
    
    18
    
    
    
    85
    
    
    
    81Gross investment income
    
    
    1,714
    
    
    
    1,695
    
    
    
    1,790Investment expense
    
    
    (40
    )
    
    
    (48
    )
    
    
    (60
    )Net investment income
    
    $
    1,674
    
    
    $
    1,647
    
    
    $
    1,730
 (a)The change in net unrealized gains (losses) on trading securities, included in net
investment income, was $2 million for the year ended December 31, 2004. The Company experienced slightly higher net investment income in 2004 as compared with 2003.
This increase was due primarily to the reduced interest expense on funds withheld and other
deposits. The interest costs on funds withheld and other deposits increased in 2003 as a result of
additional cessions to the corporate aggregate reinsurance and other treaties due to adverse net
prior year development (see the Reinsurance section of this MD&A for additional information for
interest costs on funds withheld and other deposits). This improvement was offset partly by
decreases in investment income across all other available-for-sale asset classes which is largely
the result of the impacts of the Group Benefits and Individual Life sales transactions that are
described in Note P  Significant Transactions. Also, the net investment income of the trading
portfolio positively impacted results for 2004. The Company experienced lower net investment income in 2003 as compared with 2002. This decrease
was due primarily to lower investment yields on fixed maturity securities and increased costs on
funds withheld and other deposits. The interest costs on funds withheld and other deposits
increased principally as a result of additional cessions to the corporate aggregate reinsurance and
other treaties due to adverse net prior year development 65




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recorded in 2003. This decrease in net investment income in 2003 was partially offset by increased
limited partnership income. Limited partnership income increased as a result of improving equity
markets and favorable conditions in the fixed income markets. The bond segment of the investment portfolio yielded 4.6% in 2004, 5.1% in 2003 and 6.0% in 2002. Net Realized Investment Gains (Losses) The components of net realized investment results are presented in the following table. Net Realized Investment Gains (Losses) Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Realized investment gains (losses):Fixed maturity securities:U.S. Government bonds
    
    $
    10
    
    
    $
    (70
    )
    
    $
    392Corporate and other taxable bonds
    
    
    123
    
    
    
    380
    
    
    
    (557
    )Tax-exempt bonds
    
    
    42
    
    
    
    97
    
    
    
    48Asset-backed bonds
    
    
    53
    
    
    
    42
    
    
    
    36Redeemable preferred stock
    
    
    19
    
    
    
    (12
    )
    
    
    (28
    )Total fixed maturity securities
    
    
    247
    
    
    
    437
    
    
    
    (109
    )Equity securities
    
    
    202
    
    
    
    114
    
    
    
    (158
    )Derivative securities
    
    
    (84
    )
    
    
    78
    
    
    
    (52
    )Short-term investments
    
    
    (3
    )
    
    
    3
    
    
    
    12Other, including dispositions of businesses, net of
participating policyholders interest
    
    
    (601
    )
    
    
    (168
    )
    
    
    53Realized investment gains (losses) before allocation to
participating policyholders and minority interests
    
    
    (239
    )
    
    
    464
    
    
    
    (254
    )Allocated to participating policyholders and minority interests
    
    
    (9
    )
    
    
    (4
    )
    
    
    2Income tax (expense) benefit
    
    
    95
    
    
    
    (175
    )
    
    
    103Net realized investment gains (losses), net of participating
policyholders and minority interests
    
    $
    (153
    )
    
    $
    285
    
    
    $
    (149
    )
 Net realized investment results decreased $438 million after-tax in 2004 as compared with
2003. This decrease in net realized investment results was primarily due to the loss on the sale
of the individual life insurance business of $389 million after-tax ($622 million pretax), losses
on derivatives of $55 million after-tax ($84 million pretax) and reduced fixed maturity gains.
These decreases were partly offset by a $105 million after-tax ($162 million pretax) gain on the
disposition of the Companys equity holdings of Canary Wharf Group PLC (Canary Wharf), a
London-based real estate company, and a reduction in impairment losses for other-than-temporary
declines in market values for fixed maturity and equity securities. Impairment losses of $60
million after-tax ($93 million pretax) were recorded in 2004 across various sectors including an
after-tax impairment loss of $36 million ($56 million pretax) related to loans made under a credit
facility to a national contractor, that are classified as fixed maturities. In 2003, impairment
losses of $209 million after-tax ($321 million pretax) were recorded across various sectors
including the airline, healthcare and energy industries. The derivative securities losses recorded in 2004 were primarily due to derivative securities held
to mitigate the effect of changes in long term interest rates on the value of the fixed maturity
portfolio. Net realized investment results increased $434 million after-tax in 2003 as compared with 2002.
This change was due primarily to $209 million after-tax ($321 million pretax) impairment losses for
other-than-temporary declines in market values for fixed maturity and equity securities recorded in
2003 as compared to $578 million after-tax ($890 million pretax) recorded in 2002. The impairment
losses recorded in 2002 related primarily to the telecommunications sector. Also contributing to
the increase was improved realized results related to fixed maturity and derivative securities in
2003. These increases were partially offset by the $130 million after-tax ($176 million pretax)
loss recorded in 2003 on the sale of the Group Benefits business. 66




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##### Table of Contents



A primary objective in the management of the fixed maturity and equity portfolios is to maximize
total return relative to underlying liabilities and respective liquidity needs. The Companys
views on the current interest rate environment, tax regulations, asset class valuations, specific
security issuer and broader industry segment conditions, and the domestic and global economic
conditions, are some of the factors that may enter into a decision to move between asset classes.
Based on the Companys consideration of these factors, in the course of normal investment activity
the Company may, in pursuit of the total return objective, be willing to sell securities that, in
its analysis, are overvalued on a risk adjusted basis relative to other opportunities that are
available at the time in the market; in turn the Company may purchase other securities that,
according to its analysis, are undervalued in relation to other securities in the market. In
making these value decisions, securities may be bought and sold that shift the investment portfolio
between asset classes. The Company also continually monitors exposure to issuers of securities
held and broader industry sector exposures and may from time to time reduce such exposures based on
its views of a specific issuer or industry sector. These activities will produce realized gains or
losses. The investment portfolio is periodically analyzed for changes in duration and related price change
risk. Additionally, the Company periodically reviews the sensitivity of the portfolio to the level
of foreign exchange rates or other factors that contribute to market price changes. A summary of
these risks and specific analysis on changes is included in Item 7A  Quantitative and Qualitative
Disclosures about Market Risks included herein. Under certain economic conditions, including but
not limited to a changing interest rate environment, hedging the value of the investment portfolio
by utilizing derivative strategies, which is discussed in greater detail in Notes A and C to the
Consolidated Financial Statements, may be utilized. A further consideration in the management of the investment portfolio is the characteristics of the
underlying liabilities and the ability to align the duration of the portfolio to those liabilities
to meet future liquidity needs, minimize interest rate risk and maintain a level of income
sufficient to support the underlying insurance liabilities. For portfolios where future liability
cash flows are determinable and long term in nature, the Company segregates assets for asset
liability management purposes. CNA classifies its fixed maturity securities (bonds and redeemable preferred stocks) and its equity
securities as either available-for-sale or trading, and as such, they are carried at fair value.
The amortized cost of fixed maturity securities is adjusted for amortization of premiums and
accretion of discounts to maturity, which is included in net investment income. Changes in fair
value related to available-for-sale securities are reported as a component of other comprehensive
income. Changes in fair value of trading securities are reported within net investment income. The following table provides further detail of gross realized gains and gross realized losses on
available-for-sale fixed maturity securities and equity securities. Realized Gains and Losses Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Net realized gains (losses) on fixed maturity securities
and equity securities:Fixed maturity securities:Gross realized gains
    
    $
    704
    
    
    $
    1,244
    
    
    $
    1,009Gross realized losses
    
    
    (457
    )
    
    
    (807
    )
    
    
    (1,118
    )Net realized gains (losses) on fixed maturity securities
    
    
    247
    
    
    
    437
    
    
    
    (109
    )Equity securities:Gross realized gains
    
    
    225
    
    
    
    143
    
    
    
    251Gross realized losses
    
    
    (23
    )
    
    
    (29
    )
    
    
    (409
    )Net realized gains (losses) on equity securities
    
    
    202
    
    
    
    114
    
    
    
    (158
    )Net realized gains (losses) on fixed maturity and equity
securities
    
    $
    449
    
    
    $
    551
    
    
    $
    (267
    )
 67




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##### Table of Contents



The following table provides details of the largest realized losses aggregated by issuer
including: the fair value of the securities at sale date, the amount of the loss recorded and the
period of time that the security had been in an unrealized loss position prior to sale. The period
of time that the security had been in an unrealized loss position prior to sale can vary due to the
timing of individual security purchases. Also included is a narrative providing the industry
sector along with the facts and circumstances giving rise to the loss. Largest Realized Losses from Securities Sold at a Loss  Fair
    
    
    
    
    
    Months inYear ended December 31, 2004
    
    Value
    
    
    
    
    
    UnrealizedDate of
    
    Loss
    
    Loss PriorIssuer Description and Discussion
    
    Sale
    
    On Sale
    
    To Sale(In millions)Issues and sells mortgage backed securities. Issuer was
charted by United States Congress to facilitate housing
ownership for low to middle income Americans. Loss was
incurred as a result of unfavorable interest rate change.
    
    $
    4,766
    
    
    $
    19
    
    
    
    0-12Company acquires, sells and operates power generation
facilities. The loss reflects intense competition and
price pressure in the sector.
    
    
    120
    
    
    
    18
    
    
    
    0-24
    +Various notes and bonds issued by the United States
Treasury. Volatility of interest rates prompted movement
to other asset classes.
    
    
    4,092
    
    
    
    15
    
    
    
    0-12Municipal issuer of revenue bonds that authorizes the
financing of water facilities. Loss was incurred as a
result of unfavorable interest rate change.
    
    
    309
    
    
    
    13
    
    
    
    0-12Company provides networking telecommunications services
worldwide. The company is under price/profit pressure as
a result of excess capacity in the industry.
    
    
    97
    
    
    
    11
    
    
    
    0-12Municipal issuer of special obligation bonds for school
financing. Loss was incurred as a result of unfavorable
interest rate change.
    
    
    152
    
    
    
    8
    
    
    
    0-6, 13-24Municipal issuer of revenue bonds that supports
transportation services. Loss was incurred as a result
of unfavorable interest rate change.
    
    
    296
    
    
    
    7
    
    
    
    0-12Municipal issuer of revenue bonds that authorizes the
financing of sewer facilities. Loss was incurred as a
result of unfavorable interest rate change.
    
    
    113
    
    
    
    7
    
    
    
    0-6Municipal issuer of revenue bonds that authorizes the
financing of water facilities. Loss was incurred as a
result of unfavorable interest rate change.
    
    
    200
    
    
    
    7
    
    
    
    0-12Air transportation carrier for passengers, freight and
mail both domestic and international. Company was
subject to higher fuel costs and union negotiations.
    
    
    24
    
    
    
    6
    
    
    
    0-6Municipal issuer of revenue bonds that authorizes bridge
and tunnel facilities. Loss was incurred as a result of
unfavorable interest rate change.
    
    
    103
    
    
    
    6
    
    
    
    0-12State issuer of general obligation bonds. Loss was
incurred as a result of unfavorable interest rate change.
    
    
    222
    
    
    
    5
    
    
    
    0-12State issuer of general obligation bonds for the purpose
of public improvements. Loss was incurred as a result of
unfavorable interest rate change.
    
    
    270
    
    
    
    5
    
    
    
    0-12$
    10,764
    
    
    $
    127
 68




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##### Table of Contents



Valuation and Impairment of Investments The following table details the carrying value of CNAs general account investment portfolios. Carrying Value of Investments December 31,
    
    
    
    
    
    December 31,(In millions)
    
    2004
    
    %
    
    2003
    
    %General account investments:Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations of government agencies
    
    $
    4,346
    
    
    
    11
    %
    
    $
    1,900
    
    
    
    5
    %Asset-backed securities
    
    
    7,788
    
    
    
    20
    
    
    
    8,757
    
    
    
    23States, municipalities and political subdivisions  tax-exempt
    
    
    8,857
    
    
    
    22
    
    
    
    7,970
    
    
    
    21Corporate securities
    
    
    6,513
    
    
    
    17
    
    
    
    6,482
    
    
    
    17Other debt securities
    
    
    3,053
    
    
    
    8
    
    
    
    3,264
    
    
    
    9Redeemable preferred stock
    
    
    146
    
    
    
    
    
    
    
    104
    
    
    
    Options embedded in convertible debt securities
    
    
    234
    
    
    
    1
    
    
    
    201
    
    
    
    Total fixed maturity securities available-for-sale
    
    
    30,937
    
    
    
    79
    
    
    
    28,678
    
    
    
    75Fixed maturity securities trading:U.S. Treasury securities and obligations of government agencies
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    Asset-backed securities
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    Corporate securities
    
    
    199
    
    
    
    1
    
    
    
    
    
    
    
    Other debt securities
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    Redeemable preferred stock
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity securities trading
    
    
    390
    
    
    
    1
    
    
    
    
    
    
    
    Equity securities available-for-sale:Common stock
    
    
    260
    
    
    
    1
    
    
    
    383
    
    
    
    1Non-redeemable preferred stock
    
    
    150
    
    
    
    
    
    
    
    144
    
    
    
    Total equity securities available-for-sale
    
    
    410
    
    
    
    1
    
    
    
    527
    
    
    
    1Total equity securities trading
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    Short term investments available-for-sale
    
    
    5,404
    
    
    
    14
    
    
    
    7,538
    
    
    
    20Short term investments trading
    
    
    459
    
    
    
    1
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,549
    
    
    
    4
    
    
    
    1,117
    
    
    
    3Other investments
    
    
    36
    
    
    
    
    
    
    
    240
    
    
    
    1Total general account investments
    
    $
    39,231
    
    
    
    100
    %
    
    $
    38,100
    
    
    
    100
    %
 The Companys general account investment portfolio consists primarily of publicly traded
government bonds, asset-backed and mortgage-backed securities, short-term investments, municipal
bonds and corporate bonds. Investments in the general account had a total net unrealized gain of $1,197 million at December
31, 2004 compared with $1,348 million at December 31, 2003. The unrealized position at December
31, 2004 was composed of a net unrealized gain of $1,061 million for fixed maturities and a net
unrealized gain of $136 million for equity securities. The unrealized position at December 31,
2003 was composed of a net unrealized gain of $1,114 million for fixed maturities and a net
unrealized gain of $234 million for equity securities. 69




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##### Table of Contents



Unrealized Gains (Losses) on Fixed Maturity and Equity Securities Cost or
    
    Gross
    
    Gross Unrealized Losses
    
    NetAmortized
    
    Unrealized
    
    Less than
    
    Greater than
    
    UnrealizedDecember 31, 2004(In millions)
    
    Cost
    
    Gains
    
    12 Months
    
    12 Months
    
    Gain/(Loss)Fixed maturity securities available-for-sale:U.S. Treasury securities and obligations
of government agencies
    
    $
    4,233
    
    
    $
    126
    
    
    $
    13
    
    
    $
    
    
    
    $
    113Asset-backed securities
    
    
    7,706
    
    
    
    105
    
    
    
    19
    
    
    
    4
    
    
    
    82States, municipalities and political
subdivisions  tax-exempt
    
    
    8,699
    
    
    
    189
    
    
    
    28
    
    
    
    3
    
    
    
    158Corporate securities
    
    
    6,093
    
    
    
    477
    
    
    
    52
    
    
    
    5
    
    
    
    420Other debt securities
    
    
    2,769
    
    
    
    295
    
    
    
    11
    
    
    
    
    
    
    
    284Redeemable preferred stock
    
    
    142
    
    
    
    6
    
    
    
    
    
    
    
    2
    
    
    
    4Options embedded in convertible debt
securities
    
    
    234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity securities
available-for-sale
    
    
    29,876
    
    
    
    1,198
    
    
    
    123
    
    
    
    14
    
    
    
    1,061Total fixed maturity securities trading
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity securities available-for-sale:Common stock
    
    
    148
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    112Non-redeemable preferred stock
    
    
    126
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    24Total equity securities available-for-sale
    
    
    274
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    136Total equity securities trading
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity and equity securities
    
    $
    30,586
    
    
    $
    1,334
    
    
    $
    123
    
    
    $
    14
    
    
    $
    1,197
 Unrealized Gains (Losses) on Fixed Maturity and Equity Securities Cost or
    
    Gross
    
    Gross Unrealized Losses
    
    NetAmortized
    
    Unrealized
    
    Less than
    
    Greater than
    
    UnrealizedDecember 31, 2003(In millions)
    
    Cost
    
    Gains
    
    12 Months
    
    12 Months
    
    Gain/(Loss)Fixed maturity securities:U.S. Treasury securities and
obligations of government agencies
    
    $
    1,823
    
    
    $
    91
    
    
    $
    10
    
    
    $
    4
    
    
    $
    77Asset-backed securities
    
    
    8,634
    
    
    
    146
    
    
    
    22
    
    
    
    1
    
    
    
    123States, municipalities and political
subdivisions  tax-exempt
    
    
    7,787
    
    
    
    207
    
    
    
    22
    
    
    
    2
    
    
    
    183Corporate securities
    
    
    6,061
    
    
    
    475
    
    
    
    40
    
    
    
    14
    
    
    
    421Other debt securities
    
    
    2,961
    
    
    
    311
    
    
    
    4
    
    
    
    4
    
    
    
    303Redeemable preferred stock
    
    
    97
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Options embedded in convertible debt
securities
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity securities
    
    
    27,564
    
    
    
    1,237
    
    
    
    98
    
    
    
    25
    
    
    
    1,114Equity securities:Common stock
    
    
    163
    
    
    
    222
    
    
    
    2
    
    
    
    
    
    
    
    220Non-redeemable preferred stock
    
    
    130
    
    
    
    16
    
    
    
    2
    
    
    
    
    
    
    
    14Total equity securities
    
    
    293
    
    
    
    238
    
    
    
    4
    
    
    
    
    
    
    
    234Total fixed maturity and equity securities
    
    $
    27,857
    
    
    $
    1,475
    
    
    $
    102
    
    
    $
    25
    
    
    $
    1,348
 70




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##### Table of Contents



The Companys investment policies for both the general and separate accounts emphasize high
credit quality and diversification by industry, issuer and issue. Assets supporting interest rate
sensitive liabilities are segmented within the general account to facilitate asset/liability
duration management. At December 31, 2004, the carrying value of the general account fixed maturities was $31,327
million, representing 80% of the total investment portfolio. The net unrealized gain of this fixed
maturity portfolio was $1,061 million, comprising gross unrealized gains of $1,198 million and
gross unrealized losses of $137 million. Gross unrealized losses were across various sectors, the
largest of which was corporate bonds. Within corporate bonds, the largest industry sectors were
financial and consumer-cyclical, which as a percentage of total gross unrealized losses were 40%
and 28%. Gross unrealized losses in any single issuer were less than 0.1% of the carrying value of
the total general account fixed maturity portfolio. The following table provides the composition of fixed maturity securities with an unrealized loss
at December 31, 2004 in relation to the total of all fixed maturity securities with an unrealized
loss by contractual maturities. Contractual Maturity Percent of
    
    Percent ofMarket
    
    UnrealizedValue
    
    LossDue in one year or less
    
    
    8
    %
    
    
    2
    %Due after one year through five years
    
    
    25
    
    
    
    18Due after five years through ten years
    
    
    25
    
    
    
    24Due after ten years
    
    
    15
    
    
    
    40Asset-backed securities
    
    
    27
    
    
    
    16Total
    
    
    100
    %
    
    
    100
    %
 71




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##### Table of Contents



The following table summarizes for fixed maturity and equity securities in an unrealized loss
position at December 31, 2004 and 2003, the aggregate fair value and gross unrealized loss by
length of time those securities have been continuously in an unrealized loss position. Unrealized Loss Aging December 31, 2004
    
    December 31, 2003Gross
    
    
    
    
    
    GrossEstimated
    
    Unrealized
    
    Estimated
    
    Unrealized(In millions)
    
    Fair Value
    
    Loss
    
    Fair Value
    
    LossFixed maturity securities:Investment grade:0-6 months
    
    $
    7,742
    
    
    $
    53
    
    
    $
    4,138
    
    
    $
    507-12 months
    
    
    2,448
    
    
    
    59
    
    
    
    834
    
    
    
    3613-24 months
    
    
    368
    
    
    
    12
    
    
    
    76
    
    
    
    11Greater than 24 months
    
    
    2
    
    
    
    
    
    
    
    51
    
    
    
    3Total investment grade
    
    
    10,560
    
    
    
    124
    
    
    
    5,099
    
    
    
    100Non-investment grade:0-6 months
    
    
    188
    
    
    
    7
    
    
    
    134
    
    
    
    57-12 months
    
    
    69
    
    
    
    4
    
    
    
    60
    
    
    
    713-24 months
    
    
    20
    
    
    
    2
    
    
    
    16
    
    
    
    1Greater than 24 months
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    10Total non-investment grade
    
    
    277
    
    
    
    13
    
    
    
    315
    
    
    
    23Total fixed maturity securities
    
    
    10,837
    
    
    
    137
    
    
    
    5,414
    
    
    
    123Equity securities:0-6 months
    
    
    4
    
    
    
    
    
    
    
    23
    
    
    
    27-12 months
    
    
    1
    
    
    
    
    
    
    
    10
    
    
    
    213-24 months
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    Greater than 24 months
    
    
    3
    
    
    
    
    
    
    
    6
    
    
    
    Total equity securities
    
    
    9
    
    
    
    
    
    
    
    42
    
    
    
    4Total fixed maturity and equity securities
    
    $
    10,846
    
    
    $
    137
    
    
    $
    5,456
    
    
    $
    127
 A significant judgment in the valuation of investments is the determination of when an
other-than-temporary decline in value has occurred. The Company follows a consistent and
systematic process for impairing securities that sustain other-than-temporary declines in value.
The Company has established a committee responsible for the impairment process. This committee,
referred to as the Impairment Committee, is made up of three officers appointed by the Companys
Chief Financial Officer. The Impairment Committee is responsible for analyzing watch list
securities on at least a quarterly basis. The watch list includes individual securities that fall
below certain thresholds or that exhibit evidence of impairment indicators including, but not
limited to, a significant adverse change in the financial condition and near term prospects of the
investment or a significant adverse change in legal factors, the business climate or credit
ratings. When a security is placed on the watch list, it is monitored for further fair value changes and
additional news related to the issuers financial condition. The focus is on objective evidence
that may influence the evaluation of impairment factors. The decision to impair a security incorporates both quantitative criteria and qualitative
information. The Impairment Committee considers a number of factors including, but not limited to:
(a) the length of time and the extent to which the fair value has been less than book value, (b)
the financial condition and near term prospects of the issuer, (c) the intent and ability of the
Company to retain its investment for a period of time sufficient to allow for any anticipated
recovery in value, (d) whether the debtor is current on interest and principal payments and (e)
general market conditions and industry or sector specific factors. 72




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The Impairment Committees decision to impair a security is primarily based on whether the
securitys fair value is likely to remain significantly below its book value in light of all of the
factors considered. For securities that are impaired, the security is written down to fair value
and the resulting losses are recognized in realized gains/losses in the Consolidated Statements of
Operations. Realized investment losses included $93 million, $321 million and $890 million of pretax impairment
losses for the three years ended December 31, 2004, 2003 and 2002. The 2003 and 2002 impairments
were primarily the result of the continued credit deterioration on specific issuers in the bond and
equity markets and the effects on such markets due to the overall slowing of the economy. For the
year ended December 31, 2004, the impairment losses recorded related largely to an after-tax
impairment loss related to loans made under a credit facility to a national contractor, that are
classified as fixed maturities. See the Loans to National Contractor section of the MD&A. For 2003, the impairment losses recorded related primarily to corporate bonds in the airline,
healthcare and energy industries. For 2002, the impairment losses recorded related primarily to corporate bonds in the communications
industry sectors including $129 million related to WorldCom Inc., $74 million related to Adelphia
Communication Corporation, $60 million for Charter Communications, $57 million for AT&T Canada and
$53 million for Telewest PLC. During 2002, the Company reduced the impairment loss related to the
sale of CNA Re U.K. by approximately $39 million after-tax. The Companys non-investment grade fixed maturity securities held as of December 31, 2004 that were
in an unrealized loss position had a fair value of $277 million. As discussed previously, a
significant judgment in the valuation of investments is the determination of when an
other-than-temporary impairment has occurred. The Companys Impairment Committee analyzes
securities placed on the watch list on at least a quarterly basis. Part of this analysis is to
monitor the length of time and severity of the decline below book value of the watch list
securities. The following table summarizes the fair value and gross unrealized loss of
non-investment grade securities categorized by the length of time those securities have been in a
continuous unrealized loss position and further categorized by the severity of the unrealized loss
position in 10% increments as of December 31, 2004 and 2003. Unrealized Loss Aging for Non-investment Grade Securities Estimated
    
    Fair Value as a Percentage of Book Value
    
    UnrealizedDecember 31, 2004(In millions)
    
    Fair Value
    
    90-99%
    
    80-89%
    
    70-79%
    
    <70%
    
    LossFixed maturity securities:Non-investment grade:0-6 months
    
    $
    188
    
    
    $
    6
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    77-12 months
    
    
    69
    
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    413-24 months
    
    
    20
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    2Greater than 24 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-investment grade
    
    $
    277
    
    
    $
    10
    
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    13
 73




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##### Table of Contents



Unrealized Loss Aging for Non-investment Grade Securities Estimated
    
    Fair Value as a Percentage of Book Value
    
    UnrealizedDecember 31, 2003(In millions)
    
    Fair Value
    
    90-99%
    
    80-89%
    
    70-79%
    
    <70%
    
    LossFixed maturity securities:Non-investment grade:0-6 months
    
    $
    134
    
    
    $
    2
    
    
    $
    1
    
    
    $
    
    
    
    $
    2
    
    
    $
    57-12 months
    
    
    60
    
    
    
    1
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    713-24 months
    
    
    16
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Greater than 24 months
    
    
    105
    
    
    
    4
    
    
    
    1
    
    
    
    5
    
    
    
    
    
    
    
    10Total non-investment grade
    
    $
    315
    
    
    $
    8
    
    
    $
    8
    
    
    $
    5
    
    
    $
    2
    
    
    $
    23
 As part of the ongoing impairment monitoring process, the Impairment Committee has evaluated
the facts and circumstances based on available information for each of the non-investment grade
securities and determined that no further impairments were appropriate at December 31, 2004. This
determination was based on a number of factors that the Impairment Committee regularly considers
including, but not limited to: the issuers ability to meet current and future interest and
principal payments, an evaluation of the issuers financial
condition and near term prospects, and
the Companys sector outlook and estimates of the fair value of any underlying collateral. In all
cases where a decline in value is judged to be temporary, the Company has the intent and ability to
hold these securities for a period of time sufficient to recover the book value of its investment
through a recovery in the fair value of such securities or by holding the securities to maturity.
In many cases, the securities held are matched to liabilities as part of ongoing asset/liability
duration management. As such, the Impairment Committee continually assesses its ability to hold
securities for a time sufficient to recover any temporary loss in value or until maturity. The
Company maintains sufficient levels of liquidity so as to not impact the asset/liability management
process. The Companys equity securities held as of December 31, 2004 that were in an unrealized loss
position had a fair value of $9 million. The Companys Impairment Committee, under the same
process as followed for fixed maturity securities, monitors the equity securities for
other-than-temporary declines in value. In all cases where a decline in value is judged to be
temporary, the Company expects to recover the book value of its investment through a recovery in
the fair value of the security. Invested assets are exposed to various risks, such as interest rate, market and credit risk. Due
to the level of risk associated with certain invested assets and the level of uncertainty related
to changes in the value of these assets, it is possible that changes in these risks in the near
term, including increases in interest rates, could have an adverse material impact on the Companys
results of operations or equity. The general account portfolio consists primarily of high quality bonds, 93% of which were rated as
investment grade (BBB or higher) at December 31, 2004 and 2003. The following table summarizes the
ratings of CNAs general account bond portfolio at carrying value. 74




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##### Table of Contents



General Account Bond Ratings December 31(In millions)
    
    2004
    
    %
    
    2003
    
    %U.S. Government and affiliated agency securities
    
    $
    4,640
    
    
    
    15
    %
    
    $
    2,818
    
    
    
    10
    %Other AAA rated
    
    
    14,628
    
    
    
    47
    
    
    
    12,779
    
    
    
    45AA and A rated
    
    
    5,597
    
    
    
    18
    
    
    
    6,329
    
    
    
    22BBB rated
    
    
    4,072
    
    
    
    13
    
    
    
    4,631
    
    
    
    16Non investment-grade
    
    
    2,240
    
    
    
    7
    
    
    
    2,017
    
    
    
    7Total
    
    $
    31,177
    
    
    
    100
    %
    
    $
    28,574
    
    
    
    100
    %
 At December 31, 2004 and 2003, approximately 99% and 97% of the general account portfolio was
U.S. Government agencies or was rated by Standard & Poors (S&P) or Moodys Investors Service
(Moodys). The remaining bonds were rated by other rating agencies or Company management. The following table summarizes the bond ratings of the investments supporting those separate
account products, which guarantee principal and a specified rate of interest. Separate Account Bond Ratings December 31(In millions)
    
    2004
    
    %
    
    2003
    
    %U.S. Government and affiliated agency securities
    
    $
    
    
    
    
    0
    %
    
    $
    166
    
    
    
    9
    %Other AAA rated
    
    
    156
    
    
    
    32
    
    
    
    737
    
    
    
    41AA and A rated
    
    
    184
    
    
    
    38
    
    
    
    374
    
    
    
    21BBB rated
    
    
    117
    
    
    
    24
    
    
    
    443
    
    
    
    24Non investment-grade
    
    
    29
    
    
    
    6
    
    
    
    89
    
    
    
    5Total
    
    $
    486
    
    
    
    100
    %
    
    $
    1,809
    
    
    
    100
    %
 At December 31, 2004 and 2003, 100% and 98% of the separate account portfolio was U.S.
Government agencies or was rated by S&P or Moodys. The remaining bonds were rated by other rating
agencies or Company management. Non investment-grade bonds, as presented in the tables above, are high-yield securities rated below
BBB by bond rating agencies, as well as other unrated securities that, in the opinion of
management, are below investment-grade. High-yield securities generally involve a greater degree
of risk than investment-grade securities. However, expected returns should compensate for the
added risk. This risk is also considered in the interest rate assumptions for the underlying
insurance products. The carrying value of non-traded securities at December 31, 2004 was $199 million which represents
0.5% of the Companys total investment portfolio. These securities were in a net unrealized gain
position of $68 million at December 31, 2004. Of the non-traded securities, 54% are priced by
unrelated third party sources. Included in CNAs general account fixed maturity securities at December 31, 2004 are $7,913 million
of asset-backed securities, at fair value, consisting of approximately 70% in collateralized
mortgage obligations (CMOs), 16% in corporate mortgage-backed pass-through certificates, 10% in
corporate asset-backed obligations and 4% in U.S. Government agency issued pass-through
certificates. The majority of CMOs held are actively traded in liquid markets and are priced by
broker-dealers. 75




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##### Table of Contents



The carrying value of the components of the general account short term investment portfolio is
presented in the following table. Short-term Investments December 31,
    
    December 31,(In millions)
    
    2004
    
    2003Short-term investments available-for-sale:Commercial paper
    
    $
    1,655
    
    
    $
    4,458U.S. Treasury securities
    
    
    2,382
    
    
    
    1,068Money market funds
    
    
    174
    
    
    
    1,230Other
    
    
    1,193
    
    
    
    782Total short-term investments available-for-sale
    
    
    5,404
    
    
    
    7,538Short-term investments trading:Commercial paper
    
    
    46
    
    
    
    U.S. Treasury securities
    
    
    300
    
    
    
    Money market funds
    
    
    99
    
    
    
    Other
    
    
    14
    
    
    
    Total short-term investments trading
    
    
    459
    
    
    
    Total short-term investments
    
    $
    5,863
    
    
    $
    7,538
 CNA invests in certain derivative financial instruments primarily to reduce its exposure to
market risk (principally interest rate, equity price and foreign currency risk) and credit risk
(risk of nonperformance of underlying obligor). Derivative securities are recorded at fair value
at the reporting date. The Company also uses derivatives to mitigate market risk by purchasing S&P
500â index futures in a notional amount equal to the contract liability relating
to Life and Group Non-Core indexed group annuity contracts. LIQUIDITY AND CAPITAL RESOURCES Cash Flows The principal operating cash flow sources of CNAs property and casualty and life insurance
subsidiaries are premiums and investment income. The primary operating cash flow uses are payments
for claims, policy benefits and operating expenses. For 2004, net cash provided by operating activities was $1,607 million as compared to $1,760
million in 2003. The decrease in cash provided by operating activities was primarily driven by a
decrease in premium collections related to the dispositions of the life and group businesses and
CNA Re. Offsetting the decrease in premium collections were decreased paid claims and a federal
tax refund received in 2004. For 2003, net cash provided by operating activities was $1,760 million as compared with net cash
provided of $1,040 million in 2002. The increase in cash provided by operating activities related
primarily to a decrease in paid claims and increased net premium collections in 2003 as compared
with 2002. Cash flows from investing activities include purchases and sales of financial instruments, as well
as the purchase and sale of businesses, land, buildings, equipment and other assets not generally
held for resale. The change in cash collateral exchanged as part of
the securities lending activity is included as a cash flow from investing activities. For 2004, net cash used for investing activities was $2,019 million as compared with $2,133 million
in 2003. Cash flows used by investing activities were related principally to increased purchases
of fixed maturity securities in 2004 as compared to 2003. 76




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##### Table of Contents



For 2003, net cash used for investing activities was $2,133 million as compared with net cash used
of $1,488 million in 2002. Cash flows used for investing related principally to purchases of fixed
maturity securities. The cash flow from investing activities is impacted by various factors such as the anticipated
payment of claims, financing activity, asset/liability management and individual security buy and
sell decisions made in the normal course of portfolio management. A consideration in management
of the portfolio is the characteristics of the underlying liabilities and the ability to align the
duration of the portfolio to those liabilities to meet future liquidity needs and minimize interest
rate risk. For portfolios where future liability cash flows are determinable and are generally
long term in nature, management segregates assets and related liabilities for asset/liability
management purposes. The asset/liability management strategy is used to mitigate valuation changes
due to interest rate risk in those specific portfolios. Another consideration in the
asset/liability matched portfolios is to maintain a level of income sufficient to support the
underlying insurance liabilities. For those securities in the portfolio that are not part of a segregated asset/liability management
strategy, the Company typically manages the portfolio to a target duration range dictated by the
underlying insurance liabilities. In managing these portfolios, securities are bought and sold
based on individual security value assessments made, but with the overall goal of meeting the
duration targets. Cash flows from financing activities include proceeds from the issuance of debt and equity
securities, outflows for repayment of debt and outlays to reacquire equity instruments. For the year ended December 31, 2004, net cash provided from financing activities was $368 million
as compared with $386 million in 2003. For the year ended December 31, 2003, net cash provided
from financing activities was $386 million as compared with $432 million in 2002. The Company is closely managing the cash flows related to claims and reinsurance recoverables from
the WTC event. It is anticipated that there will be a significant lag between the time claim
payments are made and the receipt of the corresponding reinsurance recoverables. The Company has
not suffered any liquidity problems resulting from these payments. As of December 31, 2004, the
Company has paid $876 million in claims and of that amount has recovered $486 million from
reinsurers. CNAs estimated gross pretax losses for the WTC event, recorded in 2001, were $1,648 million pretax
($1,071 million after-tax). Net pretax losses before the effect of corporate aggregate reinsurance
treaties were $727 million. Approximately 1%, 59% and 29% of the reinsurance recoverables on the
estimated losses related to the WTC event are from companies with S&P ratings of AAA, AA or A. The Company believes that its present cash flows from operations, investing activities and financing activities are sufficient to fund its working capital needs. 77




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##### Table of Contents



Debt Debt is composed of the following obligations. Debt December 31(In millions)
    
    2004
    
    2003Variable rate debt:Credit
facility  CNA Surety, due September 30, 2005
    
    $
    25
    
    
    $
    30Term loan
 CNA Surety, due through September 30, 2005
    
    
    10
    
    
    
    20Debenture
 CNA Surety, face amount of $31, due April 29, 2034
    
    
    30
    
    
    
    Credit
facility  CNAF, due April 30, 2004
    
    
    
    
    
    
    250Senior notes:6.500%, face amount of $493, due April 15, 2005
    
    
    493
    
    
    
    4926.750%, face amount of $250, due November 15, 2006
    
    
    249
    
    
    
    2496.450%, face amount of $150, due January 15, 2008
    
    
    149
    
    
    
    1496.600%, face amount of $200, due December 15, 2008
    
    
    199
    
    
    
    1998.375%, face amount of $70, due August 15, 2012
    
    
    69
    
    
    
    695.850%, face amount of $549, due December 15, 2014
    
    
    546
    
    
    
    6.950%, face amount of $150, due January 15, 2018
    
    
    149
    
    
    
    149Debenture, 7.250%, face amount of $243, due November 15, 2023
    
    
    241
    
    
    
    241Capital leases, 10.400%-11.500%, due through December 31, 2011
    
    
    
    
    
    
    33Other debt, 1.000%-11.5%, due through 2019
    
    
    47
    
    
    
    23Surplus notes:Encompass Insurance Company of America (EICA) surplus note,
face amount of $50, due March 31, 2006
    
    
    50
    
    
    
    Total debt
    
    $
    2,257
    
    
    $
    1,904Short term debt
    
    $
    531
    
    
    $
    263Long term debt
    
    
    1,726
    
    
    
    1,641Total debt
    
    $
    2,257
    
    
    $
    1,904
 In December of 2004, CNA acquired three buildings, which previously were leased under capital
leases. As part of the transaction, CNA directly assumed the underlying debt obligation which the
lessor of the three buildings owed to a third party. By directly assuming the lessors debt
obligation, CNA reduced its overall debt obligation by $5 million. On December 15, 2004, CNAF completed the sale of $549 million of 5.85% ten-year senior notes in a
public offering. The Company contributed approximately $47 million of the net proceeds to its
subsidiary CCC for CCC to repurchase its outstanding Group Surplus Note due 2024 and intends to use
approximately $498 million of the net proceeds of this offering to repay at maturity all of its
outstanding 6.5% notes due April 15, 2005. During 2004, Encompass Insurance Company of America (EICA), a wholly owned subsidiary of the
Company, sold a $50 million surplus note to Allstate Insurance Company. The EICA note bears
interest semi-annually at 2.5% per annum and is due on March 31, 2006. In May of 2004, CNA Surety issued privately, through a wholly-owned trust, $30 million of preferred
securities through two pooled transactions. These securities bear interest at a rate of LIBOR plus
337.5 basis points with a thirty-year term and are redeemable after five years. The securities
were issued by CNA Surety Capital Trust I (Issuer Trust). The sole asset of the Issuer Trust
consists of a $31 million junior subordinated debenture issued by CNA Surety to the Issuer Trust.
The subordinated debenture bears interest at a rate of LIBOR plus 337.5 basis points and matures in
April of 2034. As of December 31, 2004, the interest rate on the junior subordinated debenture was
5.7%. 78




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##### Table of Contents



On September 30, 2003, CNA Surety entered into a $50 million credit agreement, which consisted of a
$30 million two-year revolving credit facility and a $20 million two-year term loan, with
semi-annual principal payments of $5 million. The credit agreement is an amendment to a $65
million credit agreement, extending the revolving loan termination date from September 30, 2003 to
September 30, 2005. The new revolving credit facility was fully utilized at inception. In June of
2004, CNA Surety reduced the outstanding borrowings under the credit facility by $10 million, and
in September of 2004, CNA Surety increased the outstanding borrowings under the credit facility by
$5 million to fund the semi-annual term loan payment. Under the amended credit facility agreement, CNA Surety pays a facility fee of 35.0 basis points on
the revolving credit portion of the facility, interest at LIBOR plus 90 basis points, and for
utilization greater than 50% of the amount available to borrow an additional fee of 5.0 basis
points. On the term loan, CNA Surety pays interest at LIBOR plus 62.5 basis points. At December
31, 2004, the weighted-average interest rate on the $35 million of outstanding borrowings under the
credit agreement, including facility fees and utilization fees, was 3.3%. Effective January 30,
2003, CNA Surety entered into a swap agreement on the term loan portion of the agreement which uses
the 3-month LIBOR to determine the swap increment. As a result, the effective interest rate on the
$10 million in outstanding borrowings on the term loan was 2.77% at December 31, 2004. On the $25
million revolving credit agreement, the effective interest rate at December 31, 2004 was 3.49%. Related Parties CNA reimburses Loews, or pays directly, for management fees, travel and related expenses and
expenses of investment facilities and services provided to CNA. The amounts reimbursed or paid by
CNA were approximately $21 million, $21 million and $19 million for the years ended December 31,
2004, 2003 and 2002. CNA and its eligible subsidiaries are included in the consolidated federal income tax return of
Loews and its eligible subsidiaries. For the years ended December 31, 2004 and 2003, CNA received
$631 million and $369 million from Loews related to federal income taxes. CNA previously sponsored a stock ownership plan whereby the Company financed the purchase of
Company common stock by certain officers, including executive officers. Interest charged on the
principal amount of these outstanding stock purchase loans is generally equivalent to the long term
applicable federal rate, compounded semi-annually, in effect on the disbursement date of the loan.
Loans made pursuant to the plan are generally full recourse with a ten-year term and are secured by
the stock purchased. The balance of the loans as of December 31, 2004 exceeds the fair value of
the related common stock collateral by $35 million. CNA Surety has provided significant surety bond protection for a large national contractor that
undertakes projects for the construction of government and private facilities, a substantial
portion of which have been reinsured by CCC. In order to help this contractor meet its liquidity
needs and complete projects which had been bonded by CNA Surety, commencing in 2003 CNAF has
provided loans to the contractor through a credit facility. In December of 2004, the credit
facility was amended to increase the maximum available loans to $106 million from $86 million. The
amendment also provides that CNAF may in its sole discretion further increase the amounts available
for loans under the credit facility, up to an aggregate maximum of $126 million. As of December
31, 2004 and 2003, there were $99 million and $80 million of total debt outstanding under the credit facility.
Additional loans in January and February of 2005 brought the total debt outstanding under the credit facility, less accrued interest, to
$104 million as of February 24, 2005. Loews, through a participation agreement with CNAF, provided
funds for and owned a participation of $29 million and $25 million of the loans outstanding as of
December 31, 2004 and 2003 and has agreed to participation of one-third of any additional loans
which may be made above the original $86 million credit facility limit up to the $126 million
maximum available line. In connection with the amendment to increase the maximum available line under the credit facility
in December of 2004, the term of the loan under the credit facility was extended to mature in March
of 2009 and the interest rate was reduced prospectively from 6% over prime rate to 5% per annum,
effective as of December 27, 2004, with an additional 3% interest accrual when borrowings under the
facility are at or below the original $86 million limit. Loans under the credit facility are
secured by a pledge of substantially all of the assets of the contractor and certain of its
affiliates. In connection with the credit facility, CNAF has also guaranteed or provided
collateral for letters of credit which are charged against the maximum available line and, if drawn
upon, would be treated as loans under the 79




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##### Table of Contents



credit facility. As of December 31, 2004 and 2003, these guarantees and collateral obligations
aggregated $13 million and $7 million. As of December 31, 2004, the aggregate amount of outstanding principal and accrued interest under
the credit facility was $70 million, net of participation by Loews in the amount of $29 million. The contractor implemented a restructuring plan intended to reduce costs and improve cash flow, and
appointed a chief restructuring officer to manage execution of the plan. In the course of
addressing various expense, operational and strategic issues, however, the contractor has decided
to substantially reduce the scope of its original business and to concentrate on those segments
determined to be potentially profitable. As a consequence, operating cash flow, and in turn the
capacity to service debt, has been reduced below previous levels. Restructuring plans have also
been extended to accommodate these circumstances. In light of these developments, CNA has taken an
impairment charge of $56 million pretax ($36 million after-tax) for the fourth quarter of 2004, net
of the participation by Loews, with respect to amounts loaned under the facility. Any draws under
the credit facility beyond $106 million or further changes in the national contractors business
plan or projections may necessitate further impairment charges. As a result of the impairment taken in the fourth quarter of 2004, CNAF plans to recognize
income using the effective interest rate method starting in the first quarter of
2005. Under this method, interest income recognized will be accrued on the net carrying amount of the loan at the effective interest
rate used to discount the impaired loans estimated future cash flows. The excess of the cash
received over the interest income recognized will reduce the carrying amount of the loan. The change in present value, if any, of the loan that is attributable to changes in the amount or
timing of future cash flows will be recorded similar to the impairment charges previously recorded. CNA Surety has advised that it intends to continue to provide surety bonds on behalf of the
contractor during this extended restructuring period, subject to the contractors initial and
ongoing compliance with CNA Suretys underwriting standards and ongoing management of CNA Suretys
exposure to the contractor. All bonds written for the national contractor are issued by CCC and its
affiliates, other than CNA Surety, and are subject to underlying reinsurance treaties pursuant to which all bonds
on behalf of CNA Surety are 100% reinsured to one of CNA Suretys insurance subsidiaries. This
arrangement underlies the more limited reinsurance coverages discussed below. Through facultative reinsurance contracts with CCC, CNA Suretys exposure on bonds written from
October 1, 2002 through October 31, 2003 has been limited to $20 million per bond, with CCC to
incur 100% of losses above that level. For bonds written on or subsequent to November 1, 2003, CNA
Suretys exposure is limited to $14.5 million per bond, subject to a per principal retention of $60
million and an aggregate limit of $150 million, under all facultative insurance coverage and two
excess of loss treaties between CNA Surety and CCC. The first excess of loss contract, $40 million
excess of $60 million, provides CNA Surety coverage exclusively for the national contractor, while
the second excess of loss contract, $50 million excess of $100 million, provides CNA Surety with
coverage for the national contractor as well as other CNA Surety risks. For bonds written prior to
September 30, 2002 there is no facultative reinsurance and CCC retains 100% of the losses above the
per principal retention of $60 million. Renewals of both excess of loss contracts were effective January 1, 2005. CCC and CNA Surety are
presently discussing a possible restructuring of the reinsurance arrangements described in the
paragraph above, under which all bonds written for the national contractor would be reinsured by
CCC under an excess of $60 million treaty and other CNA Surety accounts would be covered by a
separate $50 million excess of $100 million treaty. CCC and CNA Surety continue to engage in periodic discussions with insurance regulatory authorities
regarding the level of bonds provided for this principal and will continue to apprise those
authorities regarding their ongoing exposure to this account. Indemnification and subrogation rights, including rights to contract proceeds on construction
projects in the event of default, exist that reduce CNA Suretys and ultimately the Companys
exposure to loss. While CNAF believes that the contractors continuing restructuring efforts may be
successful and provide sufficient cash flow for its operations, the contractors failure to
ultimately achieve its extended restructuring plan or perform its contractual obligations under the
credit facility or under the Companys surety bonds could have a material adverse effect on the
Companys results of operations and/ or equity. If such failures occur, the Company estimates the
surety loss, net of indemnification and subrogation recoveries, but before the effects of minority
interest, to be approximately 80




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##### Table of Contents



$200 million pretax. In addition, such failures could cause the remaining unimpaired amount due
under the credit facility to be uncollectible. Commitments, Contingencies, and Guarantees In the normal course of business, CNA has obtained letters of credit in favor of various
unaffiliated insurance companies, regulatory authorities and other entities. At December 31, 2004
and 2003, there were approximately $47 million and $58 million of outstanding letters of credit. The Company has provided guarantees related to irrevocable standby letters of credit for certain of
its subsidiaries. Certain of these subsidiaries have been sold; however, the irrevocable standby
letter of credit guarantees remain in effect. The Company would be required to make payment on the
letters of credit in question if the primary obligor drew down on these letters of credit and
failed to repay such loans in accordance with the terms of the letters of credit. The maximum
potential amount of future payments that CNA could be required to pay under these guarantees are
approximately $30 million at December 31, 2004. As of December 31, 2004 and 2003, the Company had committed approximately $104 million and $154
million to future capital calls from various third-party limited partnership investments in
exchange for an ownership interest in the related partnerships. In the normal course of investing activities, CCC had committed approximately $51 million as of
December 31, 2004 to future capital calls from certain of its unconsolidated affiliates in exchange
for an ownership interest in such affiliates. The Company holds an investment in a real estate joint venture. In the normal course of business,
CNA on a joint and several basis with other unrelated insurance company shareholders have committed
to continue funding any operating deficits of this joint venture. Additionally, CNA and the other
unrelated shareholders, on a joint and several basis, have guaranteed an operating lease for an
office building, which expires in 2016. The guarantee of the operating lease is a parallel
guarantee to the commitment to fund operating deficits; consequently, the separate guarantee to the
lessor is not expected to be triggered as long as the joint venture continues to be funded by its
shareholders and continues to make its annual lease payments. In the event that the other parties to the joint venture are unable to meet their commitments in
funding the operations of this joint venture, the Company would be required to assume the
obligation for the entire office building operating lease. The maximum potential future lease
payments at December 31, 2004 that the Company could be required to pay under this guarantee is
approximately $312 million. If CNA were required to assume the entire lease obligation, the
Company would have the right to pursue reimbursement from the other shareholders and would have the
right to all sublease revenues. The Company invests in multiple bank loan participations as part of its overall investment strategy
and has committed to additional future purchases and sales. The purchase and sale of these
investments are recorded on the date that the legal agreements are finalized and cash settlement is
made. As of December 31, 2004, the Company had commitments to purchase $41 million and commitments
to sell $2 million of various bank loan participations. In the course of selling business entities and assets to third parties, the Company has agreed to
indemnify purchasers for losses arising out of breaches of representation and warranties with
respect to the business entities or assets being sold, including, in certain cases, losses arising
from undisclosed liabilities or certain named litigation. Such indemnification provisions
generally survive for periods ranging from nine months following the applicable closing date to the
expiration of the relevant statutes of limitation. As of December 31, 2004, the aggregate amount
of quantifiable indemnification agreements in effect for sales of business entities, assets and
third party loans was $950 million. In addition, the Company has agreed to provide indemnification to third party purchasers for
certain losses associated with sold business entities or assets that are not limited by a
contractual monetary amount. As of December 31, 2004, the Company had outstanding unlimited
indemnifications in connection with the sales of certain 81




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of its business entities or assets for tax liabilities arising prior to a purchasers ownership of
an entity or asset, defects in title at the time of sale, employee claims arising prior to closing
and in some cases losses arising from certain litigation and undisclosed liabilities. These
indemnification agreements survive until the applicable statutes of limitation expire, or until the
agreed upon contract terms expire. Additionally, the Company has provided a contingent guarantee
to the lenders of two third parties, related to loans extended by their lenders. As of December
31, 2004, the Company has recorded approximately $21 million of liabilities related to these
indemnification agreements. Cash and securities with carrying values of approximately $18 million and $23 million were
deposited with financial institutions as collateral for letters of credit as of December 31, 2004
and 2003. In addition, cash and securities were deposited in trusts with financial institutions to
secure reinsurance obligations with various third parties. The carrying values of these deposits
were approximately $329 million and $254 million as of December 31, 2004 and 2003. A summary of the Companys commitments as of December 31, 2004 is presented in the following table. Contractual Commitments December 31, 2004(In millions)
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    TotalDebt (a)
    
    $
    660
    
    
    $
    416
    
    
    $
    106
    
    
    $
    442
    
    
    $
    74
    
    
    $
    1,619
    
    
    $
    3,317Lease obligations
    
    
    64
    
    
    
    55
    
    
    
    46
    
    
    
    33
    
    
    
    23
    
    
    
    72
    
    
    
    293Claim and claim expense
reserves (b)
    
    
    8,008
    
    
    
    5,794
    
    
    
    4,168
    
    
    
    2,931
    
    
    
    2,123
    
    
    
    10,429
    
    
    
    33,453Future policy benefits reserves
(c)
    
    
    195
    
    
    
    179
    
    
    
    173
    
    
    
    174
    
    
    
    170
    
    
    
    8,325
    
    
    
    9,216Policyholder funds reserves (c)
    
    
    502
    
    
    
    845
    
    
    
    152
    
    
    
    33
    
    
    
    10
    
    
    
    164
    
    
    
    1,706Guaranteed payment contracts (d)
    
    
    19
    
    
    
    11
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Total
    
    $
    9,448
    
    
    $
    7,300
    
    
    $
    4,651
    
    
    $
    3,613
    
    
    $
    2,400
    
    
    $
    20,609
    
    
    $
    48,021
  (a)
    Includes estimated future interest payments, but does not include original issue discount.(b)
    Claim and claim adjustment expense reserves are not discounted and represent the
Companys estimate of the amount and timing of the ultimate settlement and
administration of claims based on its assessment of facts and circumstances known
as of December 31, 2004. See the Reserves  Estimates and Uncertainties section of this MD&A for
further information. Claim and claim adjustment expense reserves of $21 million related to
business which has been 100% ceded to unaffiliated parties in connection with the
individual life sale are not included.(c)
    Future policy benefits and policyholder funds reserves are not discounted and represent
the Companys estimate of the amount and timing of the ultimate settlement of benefits based on its assessment of facts
and circumstances known as of December 31, 2004.
Future policy benefit reserves of $1,013 million and policyholder fund reserves of $60 million related to
business which has been 100% ceded to unaffiliated parties in connection with the individual life sale are not included.
Additional information on future policy benefits and policyholder funds reserves is included in Note A of the
Consolidated Financial Statements included under Item 8.(d)
    Primarily relating to telecommunications and software services. Regulatory Matters The Company has established a plan to reorganize and streamline its U.S. property and casualty
insurance legal entity structure. One phase of this multi-year plan was completed during 2003.
This phase served to consolidate the Companys U.S. property and casualty insurance risks into CCC,
as well as realign the capital supporting these risks. As part of this phase, the Company
implemented in the fourth quarter of 2003 a 100% quota share reinsurance 82




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agreement, effective January 1, 2003, ceding all of the net insurance risks of CIC and its 14
affiliated insurance companies (CIC Group) to CCC. Additionally, the ownership of the CIC Group
was transferred to CCC during 2003 in order to align the insurance risks with the supporting
capital. In subsequent phases of this plan, the Company will continue its efforts to reduce both
the number of U.S. property and casualty insurance entities it maintains and the number of states
in which such entities are domiciled. In order to facilitate the execution of this plan, the
Company, CCC and CIC have agreed to participate in a working group consisting of several states of
the National Association of Insurance Commissioners. In connection with the approval process for aspects of the reorganization plan, the Company agreed
to undergo a state regulatory financial examination of CCC and CIC as of December 31, 2003,
including a review of insurance reserves by an independent actuarial firm. These state regulatory
financial examinations are currently underway. The Company is presently engaged in discussions
related to the examination with state regulatory agencies. Final examination reports are expected
to be issued in the first half of 2005 by the state authorities. Pursuant to its participation in the working group referenced above, the Company has agreed to
certain time frames and informational provisions in relation to the reorganization plan. The
Company has also agreed that any proceeds from the sale of any member of the CIC pool, net of
transaction expenses, will be retained in CIC or one of its subsidiaries until the dividend
stipulation discussed below expires. Along with other companies in the industry, the Company has received subpoenas and interrogatories:
(i) from California, Connecticut, Delaware, Florida, Hawaii, Illinois, Minnesota, New Jersey, New
York, North Carolina, Pennsylvania and West Virginia concerning investigations into practices
including contingent compensation arrangements, fictitious quotes, and tying arrangements; (ii)
from the Securities and Exchange Commission and the New York State Attorney General concerning
finite insurance products purchased and sold by the Company; and (iii) from the New York State
Attorney General concerning declinations of attorney malpractice insurance. Ratings Ratings are an important factor in establishing the competitive position of insurance companies.
CNAs insurance company subsidiaries are rated by major rating agencies, and these ratings reflect
the rating agencys opinion of the insurance companys financial strength, operating performance,
strategic position and ability to meet its obligations to policyholders. Agency ratings are not a
recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by
the issuing organization. Each agencys rating should be evaluated independently of any other
agencys rating. One or more of these agencies could take action in the future to change the
ratings of CNAs insurance subsidiaries. The actions that can be taken by rating agencies are changes in ratings or modifiers. On Review,
Credit Watch and Rating Watch are modifiers used by the ratings agencies to alert those parties
relying on the Companys ratings of the possibility of a rating change in the near term. Modifiers
are utilized when the agencies are uncertain as to the impact of a Company action or initiative,
which could prove to be material to the current rating level. Modifiers are generally used to
indicate a possible change in rating within 90 days. Outlooks accompanied with ratings are
additional modifiers used by the rating agencies to alert those parties relying on the Companys
ratings of the possibility of a rating change in the longer term. The time frame referenced in an
outlook is not necessarily limited to ninety days as defined in the Credit-Watch category. 83




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The table below reflects the various group ratings issued by A.M. Best, Fitch, Moodys and Standard
and Poors as of February 16, 2005 for the Property and Casualty and Life companies. The table
also includes the ratings for CNAFs senior debt and Continental senior debt. Insurance Financial Strength Ratings
    
    Debt RatingsProperty & Casualty (a)
    
    Life
    
    CNAF
    
    ContinentalCCC
    
    CIC
    
    
    
    Senior
    
    SeniorGroup
    
    Group
    
    CAC (b)
    
    Debt
    
    DebtA.M. Best
    
    A
    
    A
    
    A-
    
    bbb
    
    Not RatedFitch
    
    A-
    
    A-
    
    A-
    
    BBB-
    
    BBB-Moodys
    
    A3
    
    A3
    
    Baa1
    
    Baa3
    
    Baa3S&P
    
    A-
    
    A-
    
    BBB+
    
    BBB-
    
    BBB-
  (a)
    All outlooks for the Property & Casualty companies financial strength and holding
company debt ratings are negative.(b)
    A.M. Best and Moodys have a stable outlook while Fitch and S&P have negative outlooks on the
CAC rating. If CNAs property and casualty insurance financial strength ratings were downgraded below
current levels, CNAs business and results of operations could be materially adversely affected.
The severity of the impact on CNAs business is dependent on the level of downgrade and, for
certain products, which rating agency takes the rating action. Among the adverse effects in the
event of such downgrades would be the inability to obtain a material volume of business from
certain major insurance brokers, the inability to sell a material volume of the Companys insurance
products to certain markets, and the required collateralization of certain future payment
obligations or reserves. In addition, the Company believes that a lowering of the debt ratings of Loews by certain of these
agencies could result in an adverse impact on CNAs ratings, independent of any change in
circumstances at CNA. Each of the major rating agencies which rates Loews currently maintains a
negative outlook, but none currently has Loews on negative Credit Watch. The Company has entered into several settlement agreements and assumed reinsurance contracts that
require collateralization of future payment obligations and assumed reserves if the Companys
ratings or other specific criteria fall below certain thresholds. The ratings triggers are
generally more than one level below the Companys February 16, 2005 ratings. Dividends from Subsidiaries CNAFs ability to pay dividends and other credit obligations is significantly dependent on receipt
of dividends from its subsidiaries. The payment of dividends to CNAF by its insurance subsidiaries
without prior approval of the insurance department of each subsidiarys domiciliary jurisdiction is
limited by formula. Dividends in excess of these amounts are subject to prior approval by the
respective state insurance departments. Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the
domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require
prior approval of the Illinois Department of Financial and Professional Regulation  Division of
Insurance (the Department), may be paid only from earned surplus, which is calculated by removing
unrealized gains from unassigned surplus. As of December 31, 2004, CCC is in a negative earned
surplus position. In December of 2004, the Department approved extraordinary dividend capacity of
$125 million to be used to fund CNAFs 2005 debt service requirements. It is anticipated that CCC
will be in a positive earned surplus position at the end of the first quarter of 2005 and be able
to begin paying ordinary dividends in the second quarter of 2005 as a result of a $500 million
dividend received from its subsidiary, CAC, on February 11, 2005. By agreement with the New Hampshire Insurance Department, the CIC Group may not pay dividends to
CCC until after January 1, 2006. CNAs domestic insurance subsidiaries are subject to risk-based capital requirements. Risk-based
capital is a method developed by the NAIC to determine the minimum amount of statutory capital
appropriate for an insurance company to support its overall business operations in consideration of
its size and risk profile. The formula for determining the amount of risk-based capital specifies
various factors, weighted based on the perceived degree of risk, which are applied to certain
financial balances and financial activity. The adequacy of a companys actual 84




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capital is evaluated by a comparison to the risk-based capital results, as determined by the
formula. Companies below minimum risk-based capital requirements are classified within certain
levels, each of which requires specified corrective action. As of December 31, 2004 and 2003, all
of CNAs domestic insurance subsidiaries exceeded the minimum risk-based capital requirements. Loews During 2003, CNA completed a strategic review of its operations and decided to concentrate efforts
on its property and casualty business. As a result of this review, and 2003 charges of $1,849
million after-tax ($2,845 million pretax) related to unfavorable net prior year development and a
$396 million after-tax ($610 million pretax) increase in the provision for reinsurance and
insurance receivables, a capital plan was developed to replenish statutory capital of the property
and casualty subsidiaries adversely impacted by these charges. A summary of the capital plan,
related actions, and other significant 2003 business decisions is discussed below: In November of 2003, the Company established a capital plan to replenish statutory capital impacted
by the strategic review and charges for prior year development and related matters. Under the
capital plan, in November of 2003, CNAF sold to Loews $750 million of a new series of convertible
preferred stock which converted into 32,327,015 shares of CNAF common
stock on April 20, 2004, and
received commitments from Loews for additional capital support of up to $650 million through the
purchase of surplus notes of CCC, CNAs principal insurance subsidiary in the event certain
additions to CCCs statutory capital were not achieved through asset sales. As a result of this
commitment, Loews purchased $300 million principal amount of surplus notes in February of 2004 in
relation to CNAs sale of the individual life business and $46 million principal amount of surplus
notes in February of 2004 in relation to the sale of the group benefits business. The $300 million
surplus note was repaid in June of 2004, and the $46 million surplus note was repaid in December of
2004, thereby fulfilling all of the commitments under the capital plan. The Series H Cumulative Preferred Issue (Series H) is senior to CNAFs common stock as to the
payment of dividends and amounts payable upon any liquidation, dissolution or winding up. No
dividends may be declared on CNAFs common stock until all cumulative dividends on the Series H
Issue have been paid. CNAF may not issue any equity securities ranking senior to or on par with
the Series H Issue without the consent of a majority of its stockholders. The Series H Issue is
non-voting and is not convertible into any other securities of CNAF. It may be redeemed only upon
the mutual agreement of CNAF and a majority of the stockholders of the preferred stock. Accounting Pronouncements In December of 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123R), that amends
Statement of Financial Accounting Standard No. 123 (SFAS 123), as originally issued in May of 1995.
SFAS 123R addresses the accounting for share-based payment transactions in which an enterprise
receives employee services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprises equity instruments or that may be
settled by the issuance of such equity instruments. SFAS 123R supercedes Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). After the
effective date of this standard, entities will not be permitted to use the intrinsic value method
specified in APB 25 to measure compensation expense and generally would be required to measure
compensation expense using a fair-value based method. Public companies are to apply this standard
using either the modified prospective method or the modified retrospective method. The modified
prospective method requires a company to (a) record compensation expense for all awards it grants
after the date it adopts the standard and (b) record compensation expense for the unvested portion
of previously granted awards that remain outstanding at the date of adoption. The modified
retrospective method requires companies to record compensation expense to either (a) all prior
years for which SFAS 123 was effective (i.e. for all fiscal years beginning after December 15,
2004) or (b) only to prior interim periods in the year of initial adoption if the effective date of
SFAS 123R does not coincide with the beginning of the fiscal year. SFAS 123R is effective for
interim or annual periods beginning after June 15, 2005. Adoption of this standard is not expected
to have a material impact on the Companys results of operations and/or equity. 85




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In March of 2004, the Emerging Issues Task Force (EITF) reached consensus on the guidance provided
in EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments (EITF 03-1), as applicable to debt and equity securities that are within the
scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115)
and equity securities that are accounted for using the cost method specified in Accounting
Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock.
Under EITF 03-1 an investment is impaired if the fair value of the investment is less than its cost
including adjustments for amortization, accretion, foreign exchange, and hedging. An impairment
would be considered other-than-temporary unless a) the investor has the ability and intent to hold
an investment for a reasonable period of time sufficient for the recovery of the fair value up to
(or beyond) the cost of the investment and b) evidence indicating that the cost of the investment
is recoverable within a reasonable period of time outweighs evidence to the contrary. This new
guidance for determining whether impairment is other-than-temporary was to be effective for
reporting periods beginning after June 15, 2004. In September of 2004, the FASB issued FASB Staff
Position EITF Issue 03-1-1, which suspended the effective date for the measurement and recognition
guidance included in EITF Issue 03-1 related to other-than-temporary impairment until additional
implementation guidance is provided. Pending adoption of the final rule, the Company continued to
apply existing accounting literature for determining when a decline in fair value is
other-than-temporary. The Company continues to evaluate the impact of this new accounting standard on its process for
determining other-than-temporary impairment of equity and fixed maturity securities, including the
potential impacts from any revisions to the original guidance issued. Adoption of this standard as
originally issued may cause the Company to recognize impairment losses in the Consolidated
Statements of Operations which would not have been recognized under the current guidance or to
recognize such losses in earlier periods, especially those due to increases in interest rates, and
could also impact the recognition of investment income on impaired securities. Such an impact
would likely increase earnings volatility in future periods. However, since fluctuations in the
fair value for available-for-sale securities are already recorded in Accumulated Other
Comprehensive Income, adoption of this standard is not expected to have a significant impact on
equity. FORWARD-LOOKING STATEMENTS This report contains a number of forward-looking statements which relate to anticipated future
events rather than actual present conditions or historical events. You can identify
forward-looking statements because generally they include words such as believes, expects,
intends, anticipates, estimates, and similar expressions. Forward-looking statements in this
report include any and all statements regarding expected developments in the Companys insurance
business, including losses and loss reserves for asbestos, environmental pollution and mass tort
claims which are more uncertain, and therefore more difficult to estimate than loss reserves
respecting traditional property and casualty exposures; the impact of routine ongoing insurance
reserve reviews the Company is conducting; the ongoing state regulatory examinations of the
Companys primary insurance company subsidiaries, and the Companys responses to the results of
those reviews and examinations; the Companys expectations concerning its revenues, earnings,
expenses and investment activities; expected cost savings and other results from the Companys
expense reduction and restructuring activities; and the Companys proposed actions in response to
trends in its business. Forward-looking statements, by their nature, are subject to a variety of
inherent risks and uncertainties that could cause actual results to differ materially from the
results projected in the forward-looking statement. Many of these risks and uncertainties cannot
be controlled by the Company. Some examples of these risks and uncertainties are:  
    general economic and business conditions, including inflationary pressures on
medical care costs, construction costs and other economic sectors that increase the severity
of claims;
    changes in financial markets such as fluctuations in interest rates, long-term
periods of low interest rates, credit conditions and currency, commodity and stock prices;
    the effects of corporate bankruptcies, such as Enron and WorldCom, on surety bond
claims, as well as on capital markets, and on the markets for directors and officers and
errors and omissions coverages;
    changes in foreign or domestic political, social and economic conditions;   86




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
    regulatory initiatives and compliance with governmental regulations, judicial
decisions, including interpretation of policy provisions, decisions regarding coverage and
theories of liability, trends in litigation and the outcome of any litigation involving the
Company, and rulings and changes in tax laws and regulations;
    effects upon insurance markets and upon industry business practices and
relationships of current litigation, investigations and regulatory activity by the New York
State Attorney Generals office and other authorities concerning contingent commission
arrangements with brokers and bid solicitation activities;
    legal and regulatory activities with respect to certain non-traditional and
finite-risk insurance products, and possible resulting changes in accounting and financial
reporting rules in relation to such products;
    regulatory limitations, impositions and restrictions upon the Company, including
the effects of assessments and other surcharges for guaranty funds and second-injury funds and
other mandatory pooling arrangements;
    the impact of competitive products, policies and pricing and the competitive
environment in which the Company operates, including changes in the Companys book of
business;
    product and policy availability and demand and market responses, including the
level of ability to obtain rate increases and decline or non-renew of under priced accounts,
to achieve premium targets and profitability and to realize growth and retention estimates;
    development of claims and the impact on loss reserves, including changes in claim
settlement policies;
    the effectiveness of current initiatives by claims management to reduce loss and
expense ratio through more efficacious claims handling techniques;
    the performance of reinsurance companies under reinsurance contracts with the Company;
    results of financing efforts, including the availability of bank credit facilities;
    changes in the Companys composition of operating segments;
    weather and other natural physical events, including the severity and frequency of
storms, hail, snowfall and other winter conditions, as well as of natural disasters such as
hurricanes and earthquakes;
    man-made disasters, including the possible occurrence of terrorist attacks and the
effect of the absence or insufficiency of applicable terrorism legislation on coverages;
    the possibility that the Terrorism Risk Insurance Act of 2002 will not be extended
beyond the end of 2005, as a result of which the Company could incur substantial additional
exposure to losses resulting from terrorist attacks, which could be increased by current state
regulatory restrictions on terrorism policy exclusions and by regulatory unwillingness to
approve such exclusions prospectively;
    the occurrence of epidemics;
    exposure to liabilities due to claims made by insureds and others relating to
asbestos remediation and health-based asbestos impairments, as well as exposure to liabilities
for environmental pollution, mass tort, and construction defect claims;
    whether a national privately financed trust to replace litigation of asbestos
claims with payments to claimants from the trust will be established or approved through
federal legislation, or, if established and approved, whether it will contain funding
requirements in excess of the Companys established loss reserves or carried loss reserves;
    the sufficiency of the Companys loss reserves and the possibility of future
increases in reserves;
    regulatory limitations and restrictions, including limitations upon the Companys
ability to receive dividends from its insurance subsidiaries imposed by state regulatory
agencies and minimum risk-based capital standards established by the National Association of
Insurance Commissioners;
    the risks and uncertainties associated with the Companys loss reserves as
outlined in the Reserves  Estimates and Uncertainties section of this Managements Discussion
and Analysis of Financial Condition and Results of Operations;   87




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
    the level of success in integrating acquired businesses and operations, and in
consolidating, or selling existing ones;
    the possibility of further changes in the Companys ratings by ratings agencies,
including the inability to access certain markets or distribution channels and the required
collateralization of future payment obligations as a result of such changes, and changes in
rating agency policies and practices; and
    the actual closing of contemplated transactions and agreements. The Companys forward-looking statements speak only as of the date on which they are made and the
Company does not have any obligation to update or revise any forward-looking statement to reflect
events or circumstances after the date of the statement, even if the Companys expectations or any
related events or circumstances change. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is a broad term related to changes in the fair value of a financial instrument.
Discussions herein regarding market risk focus on only one element of market risk-price risk.
Price risk relates to changes in the level of prices due to changes in interest rates, equity
prices, foreign exchange rates or other factors that relate to market volatility of the rate, index
or price underlying the financial instrument. The Companys primary market risk exposures are due
to changes in interest rates, although the Company has certain exposures to changes in equity
prices and foreign currency exchange rates. The fair value of the financial instruments is
adversely affected when interest rates rise, equity markets decline and the dollar strengthens
against foreign currency. Active management of market risk is integral to the Companys operations. The Company may use the
following tools to manage its exposure to market risk within defined tolerance ranges: (1) change
the character of future investments purchased or sold, (2) use derivatives to offset the market
behavior of existing assets and liabilities or assets expected to be purchased and liabilities to
be incurred, or (3) rebalance its existing asset and liability portfolios. In accordance with the provisions of SOP 03-01, the classification and presentation of certain
balance sheet and income statement items have been modified. Accordingly, the investment
securities previously classified as separate account assets have now been reclassified to the
general account and will be reported based on their investment classification whether
available-for-sale or trading securities. The investment portfolio for the indexed group annuity
contracts is classified as held for trading purposes and is carried at fair value, with both the
net realized and unrealized gains (losses) included within net investment income in the
Consolidated Statement of Operations. Consistent with the requirements of SOP 03-01, prior year
amounts have not been conformed to the current year presentation. Beginning in the fourth quarter of 2004, the Company has designated new purchases related to a
specific investment strategy, that primarily includes convertible bond securities, as held for
trading purposes. These securities in the trading portfolio are carried at fair value, with both
the net realized and unrealized gains (losses) included within net investment income in the
Consolidated Statements of Operations included under Item 8. 88




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Sensitivity Analysis CNA monitors its sensitivity to interest rate risk by evaluating the change in the value of
financial assets and liabilities due to fluctuations in interest rates. The evaluation is
performed by applying an instantaneous change in interest rates of varying magnitudes on a static
balance sheet to determine the effect such a change in rates would have on the Companys fair value
at risk and the resulting effect on stockholders equity. The analysis presents the sensitivity of
the fair value of the Companys financial instruments to selected changes in market rates and
prices. The range of change chosen reflects the Companys view of changes that are reasonably
possible over a one-year period. The selection of the range of values chosen to represent changes
in interest rates should not be construed as the Companys prediction of future market events, but
rather an illustration of the impact of such events. The sensitivity analysis estimates the decline in the fair value of the Companys interest
sensitive assets and liabilities that were held on December 31, 2004 and December 31, 2003 due to
instantaneous parallel increases in the period end yield curve of 100 and 150 basis points. The sensitivity analysis also assumes an instantaneous 10% and 20% decline in the foreign currency
exchange rates versus the United States dollar from their levels at December 31, 2004 and December
31, 2003, with all other variables held constant. Equity price risk was measured assuming an instantaneous 10% and 25% decline in the S&P 500 Index
(Index) from its level at December 31, 2004 and December 31, 2003, with all other variables held
constant. The Companys equity holdings were assumed to be highly and positively correlated with
the Index. At December 31, 2004, a 10% and 25% decrease in the Index would result in a $214
million and $534 million decrease compared to a $245 million and $612 million decrease at December
31, 2003, in the market value of the Companys equity investments. Of these amounts, under the 10% and 25% scenarios, $5 million and $14 million at December 31, 2004
and $168 million and $418 million at December 31, 2003 pertained to decreases in the market value
of the separate account investments. These decreases would substantially be offset by decreases in
related separate account liabilities to customers. Similarly, increases in the market value of the
separate account equity investments would also be offset by increases in the same related separate
account liabilities by the same approximate amounts. 89




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The following tables present the estimated effects on the fair value of the Companys financial
instruments at December 31, 2004 and December 31, 2003, due to an increase in interest rates of 100
basis points, a 10% decline in foreign currency exchange rates and a 10% decline in the Index. Market Risk Scenario 1 Increase (Decrease)Fair
    
    Interest
    
    Currency
    
    EquityDecember 31, 2004 (In millions)
    
    Value
    
    Rate Risk
    
    Risk
    
    RiskGeneral account:Fixed maturity securities available-for-sale
    
    $
    30,937
    
    
    $
    (1,824
    )
    
    $
    (88
    )
    
    $
    (26
    )Fixed maturity securities trading
    
    
    390
    
    
    
    (4
    )
    
    
    (1
    )
    
    
    (3
    )Equity securities available-for-sale
    
    
    410
    
    
    
    
    
    
    
    (9
    )
    
    
    (41
    )Equity securities trading
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Short term investments available-for-sale
    
    
    5,404
    
    
    
    (7
    )
    
    
    (10
    )
    
    
    Short term investments trading
    
    
    459
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,549
    
    
    
    6
    
    
    
    
    
    
    
    (18
    )Other invested assets
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    (8
    )
    
    
    8
    
    
    
    
    
    
    
    Equity index futures for trading
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (116
    )Other derivative securities
    
    
    2
    
    
    
    7
    
    
    
    (21
    )
    
    
    Total general account
    
    
    39,231
    
    
    
    (1,812
    )
    
    
    (129
    )
    
    
    (209
    )Separate accounts:Fixed maturity securities
    
    
    486
    
    
    
    (24
    )
    
    
    
    
    
    
    Equity securities
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Short term investments
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    561
    
    
    
    (24
    )
    
    
    
    
    
    
    (5
    )Total securities
    
    $
    39,792
    
    
    $
    (1,836
    )
    
    $
    (129
    )
    
    $
    (214
    )Debt (carrying value)
    
    $
    2,257
    
    
    $
    (97
    )
    
    $
    
    
    
    $
    
 90




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##### Table of Contents



Market Risk Scenario 1 Increase (Decrease)Fair
    
    Interest
    
    Currency
    
    EquityDecember 31, 2003(In millions)
    
    Value
    
    Rate Risk
    
    Risk
    
    RiskHeld for Other Than Trading Purposes:General account:Fixed maturity securities
    
    $
    28,678
    
    
    $
    (1,979
    )
    
    $
    (35
    )
    
    $
    (13
    )Equity securities
    
    
    527
    
    
    
    
    
    
    
    (26
    )
    
    
    (51
    )Short term investments
    
    
    7,538
    
    
    
    (5
    )
    
    
    (16
    )
    
    
    Limited partnerships
    
    
    1,117
    
    
    
    5
    
    
    
    
    
    
    
    (13
    )Other invested assets
    
    
    233
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    (5
    )
    
    
    3
    
    
    
    
    
    
    
    Other derivative securities
    
    
    12
    
    
    
    (108
    )
    
    
    1
    
    
    
    Total general account
    
    
    38,100
    
    
    
    (2,084
    )
    
    
    (76
    )
    
    
    (77
    )Separate accounts:Fixed maturity securities
    
    
    1,809
    
    
    
    (113
    )
    
    
    
    
    
    
    Equity securities
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Short term investments
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    Other invested assets
    
    
    415
    
    
    
    
    
    
    
    
    
    
    
    (41
    )Total separate accounts
    
    
    2,423
    
    
    
    (113
    )
    
    
    
    
    
    
    (53
    )Total securities held for other than trading purposes
    
    
    40,523
    
    
    
    (2,197
    )
    
    
    (76
    )
    
    
    (130
    )Held for Trading Purposes:Separate accounts:Fixed maturity securities
    
    
    304
    
    
    
    (4
    )
    
    
    
    
    
    
    (1
    )Short term investments
    
    
    414
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    419
    
    
    
    2
    
    
    
    
    
    
    
    (3
    )Equity indexed futures
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (111
    )Other derivative securities
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    Total securities held for trading purposes
    
    
    1,137
    
    
    
    (1
    )
    
    
    
    
    
    
    (115
    )Total securities
    
    $
    41,660
    
    
    $
    (2,198
    )
    
    $
    (76
    )
    
    $
    (245
    )Debt (carrying value)
    
    $
    1,904
    
    
    $
    (70
    )
    
    $
    
    
    
    $
    
 91




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##### Table of Contents



The following tables present the estimated effects on the fair value of the Companys
financial instruments at December 31, 2004 and December 31, 2003, due to an increase in interest
rates of 150 basis points, a 20% decline in foreign currency exchange rates and a 25% decline in
the Index. Market Risk Scenario 2 Increase (Decrease)Fair
    
    Interest
    
    Currency
    
    EquityDecember 31, 2004(In millions)
    
    Value
    
    Rate Risk
    
    Risk
    
    RiskGeneral account:Fixed maturity securities available-for-sale
    
    $
    30,937
    
    
    $
    (2,703
    )
    
    $
    (177
    )
    
    $
    (63
    )Fixed maturity securities trading
    
    
    390
    
    
    
    (6
    )
    
    
    (1
    )
    
    
    (8
    )Equity securities available-for-sale
    
    
    410
    
    
    
    
    
    
    
    (18
    )
    
    
    (103
    )Equity securities trading
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    (11
    )Short term investments available-for-sale
    
    
    5,404
    
    
    
    (11
    )
    
    
    (20
    )
    
    
    Short term investments trading
    
    
    459
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    1,549
    
    
    
    9
    
    
    
    
    
    
    
    (46
    )Other invested assets
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    (8
    )
    
    
    12
    
    
    
    
    
    
    
    Equity index futures for trading
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    (289
    )Other derivative securities
    
    
    2
    
    
    
    10
    
    
    
    (38
    )
    
    
    Total general account
    
    
    39,231
    
    
    
    (2,686
    )
    
    
    (254
    )
    
    
    (520
    )Separate accounts:Fixed maturity securities
    
    
    486
    
    
    
    (35
    )
    
    
    
    
    
    
    Equity securities
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    (14
    )Short term investments
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    Total separate accounts
    
    
    561
    
    
    
    (35
    )
    
    
    
    
    
    
    (14
    )Total securities
    
    $
    39,792
    
    
    $
    (2,721
    )
    
    $
    (254
    )
    
    $
    (534
    )Debt (carrying value)
    
    $
    2,257
    
    
    $
    (141
    )
    
    $
    
    
    
    $
    
 92




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##### Table of Contents



Market Risk Scenario 2 Increase (Decrease)Fair
    
    Interest
    
    Currency
    
    EquityDecember 31, 2003(In millions)
    
    Value
    
    Rate Risk
    
    Risk
    
    RiskHeld for Other Than Trading Purposes:General account:Fixed maturity securities
    
    $
    28,678
    
    
    $
    (2,896
    )
    
    $
    (71
    )
    
    $
    (32
    )Equity securities
    
    
    527
    
    
    
    
    
    
    
    (52
    )
    
    
    (129
    )Short term investments
    
    
    7,538
    
    
    
    (7
    )
    
    
    (32
    )
    
    
    Limited partnerships
    
    
    1,117
    
    
    
    7
    
    
    
    
    
    
    
    (33
    )Other invested assets
    
    
    233
    
    
    
    
    
    
    
    
    
    
    
    Interest rate caps
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    (5
    )
    
    
    4
    
    
    
    
    
    
    
    Other derivative securities
    
    
    12
    
    
    
    (184
    )
    
    
    3
    
    
    
    Total general account
    
    
    38,100
    
    
    
    (3,075
    )
    
    
    (152
    )
    
    
    (194
    )Separate accounts:Fixed maturity securities
    
    
    1,809
    
    
    
    (165
    )
    
    
    
    
    
    
    Equity securities
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    (29
    )Short term investments
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    Other invested assets
    
    
    415
    
    
    
    
    
    
    
    
    
    
    
    (103
    )Total separate accounts
    
    
    2,423
    
    
    
    (165
    )
    
    
    
    
    
    
    (132
    )Total securities held for other than trading purposes
    
    
    40,523
    
    
    
    (3,240
    )
    
    
    (152
    )
    
    
    (326
    )Held for Trading Purposes:Separate accounts:Fixed maturity securities
    
    
    304
    
    
    
    (6
    )
    
    
    
    
    
    
    (2
    )Short term investments
    
    
    414
    
    
    
    (1
    )
    
    
    
    
    
    
    Limited partnerships
    
    
    419
    
    
    
    3
    
    
    
    
    
    
    
    (7
    )Equity indexed futures
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    (277
    )Other derivative securities
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    Total securities held for trading purposes
    
    
    1,137
    
    
    
    (1
    )
    
    
    
    
    
    
    (286
    )Total securities
    
    $
    41,660
    
    
    $
    (3,241
    )
    
    $
    (152
    )
    
    $
    (612
    )Debt (carrying value)
    
    $
    1,904
    
    
    $
    (102
    )
    
    $
    
    
    
    $
    
 93




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
 CNA Financial Corporation
Consolidated Statements of Operations Years ended December 31(In millions, except per share data)
    
    2004
    
    2003
    
    2002Revenues:Net earned premiums
    
    $
    8,209
    
    
    $
    9,214
    
    
    $
    10,213Net investment income
    
    
    1,674
    
    
    
    1,647
    
    
    
    1,730Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    (248
    )
    
    
    460
    
    
    
    (252
    )Other revenues
    
    
    295
    
    
    
    395
    
    
    
    595Total revenues
    
    
    9,930
    
    
    
    11,716
    
    
    
    12,286Claims, Benefits and Expenses:Insurance claims and policyholders benefits
    
    
    6,446
    
    
    
    10,287
    
    
    
    8,420Amortization of deferred acquisition costs
    
    
    1,680
    
    
    
    1,965
    
    
    
    1,791Other operating expenses
    
    
    1,183
    
    
    
    1,686
    
    
    
    1,621Restructuring and other related charges
    
    
    
    
    
    
    
    
    
    
    (37
    )Interest
    
    
    124
    
    
    
    130
    
    
    
    150Total claims, benefits and expenses
    
    
    9,433
    
    
    
    14,068
    
    
    
    11,945Income (loss) from continuing operations before income tax and
minority interest
    
    
    497
    
    
    
    (2,352
    )
    
    
    341Income tax (expense) benefit
    
    
    (29
    )
    
    
    913
    
    
    
    (68
    )Minority interest
    
    
    (27
    )
    
    
    6
    
    
    
    (26
    )Income (loss) from continuing operations
    
    
    441
    
    
    
    (1,433
    )
    
    
    247Loss from discontinued operations, net of tax of $9
    
    
    
    
    
    
    
    
    
    
    (35
    )Income (loss) before cumulative effect of change in accounting
principle
    
    
    441
    
    
    
    (1,433
    )
    
    
    212Cumulative effect of change in accounting principle, net of tax of $7
    
    
    
    
    
    
    
    
    
    
    (57
    )Net income (loss)
    
    $
    441
    
    
    $
    (1,433
    )
    
    $
    155Basic and diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    1.47
    
    
    $
    (6.58
    )
    
    $
    1.10Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.16
    )Income (loss) before cumulative effect of change in accounting
principle
    
    
    1.47
    
    
    
    (6.58
    )
    
    
    0.94Cumulative effect of change in accounting principle, net
of tax
    
    
    
    
    
    
    
    
    
    
    (0.26
    )Basic and diluted earnings (loss) per share available to common
stockholders
    
    $
    1.47
    
    
    $
    (6.58
    )
    
    $
    0.68Weighted average outstanding common stock and common stock
equivalents
    
    
    256.0
    
    
    
    227.0
    
    
    
    223.6
 The accompanying Notes are
an integral part of these Consolidated Financial Statements. 94




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##### Table of Contents



CNA Financial Corporation
Consolidated Balance Sheets December 31(In millions, except share data)
    
    2004
    
    2003AssetsInvestments:Fixed maturity securities at fair value (amortized cost of $30,266 and $27,564)
    
    $
    31,327
    
    
    $
    28,678Equity securities at fair value (cost of $320 and $293)
    
    
    456
    
    
    
    527Limited partnership investments
    
    
    1,549
    
    
    
    1,117Other invested assets
    
    
    36
    
    
    
    240Short-term investments, at fair value which approximates cost
    
    
    5,863
    
    
    
    7,538Total investments
    
    
    39,231
    
    
    
    38,100Cash
    
    
    95
    
    
    
    139Reinsurance receivables (less allowance for uncollectible receivables of $531 and $573)
    
    
    15,463
    
    
    
    15,681Insurance receivables (less allowance for doubtful accounts of $517 and $375)
    
    
    2,050
    
    
    
    2,707Accrued investment income
    
    
    297
    
    
    
    323Receivables for securities sold
    
    
    496
    
    
    
    836Deferred acquisition costs
    
    
    1,268
    
    
    
    2,533Prepaid reinsurance premiums
    
    
    1,128
    
    
    
    1,361Federal income taxes recoverable (includes $7 and $594 due from Loews Corporation)
    
    
    
    
    
    
    607Deferred income taxes
    
    
    692
    
    
    
    600Property and equipment at cost (less accumulated depreciation of $524 and $727)
    
    
    235
    
    
    
    314Goodwill and other intangible assets
    
    
    162
    
    
    
    162Other assets
    
    
    815
    
    
    
    1,571Separate account business
    
    
    568
    
    
    
    3,678Total assets
    
    $
    62,500
    
    
    $
    68,612
 95




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##### Table of Contents



2004
    
    2003Liabilities and Stockholders EquityLiabilities:Insurance reserves:Claim and claim adjustment expenses
    
    $
    31,520
    
    
    $
    31,730Unearned premiums
    
    
    4,522
    
    
    
    5,000Future policy benefits
    
    
    5,883
    
    
    
    8,161Policyholders funds
    
    
    1,725
    
    
    
    601Collateral on loaned securities
    
    
    918
    
    
    
    442Payables for securities purchased
    
    
    288
    
    
    
    1,902Participating policyholders funds
    
    
    63
    
    
    
    118Short term debt
    
    
    531
    
    
    
    263Long term debt
    
    
    1,726
    
    
    
    1,641Reinsurance balances payable
    
    
    3,043
    
    
    
    3,432Other liabilities
    
    
    2,231
    
    
    
    2,436Separate account business
    
    
    568
    
    
    
    3,678Total liabilities
    
    
    53,018
    
    
    
    59,404Commitments and contingencies (Notes F, G, I and K)Minority interest
    
    
    275
    
    
    
    256Stockholders equity:Preferred stock (12,500,000 shares authorized)Series H Issue (no par value; $100,000 stated value; 7,500 shares issued; held by Loews Corporation)
    
    
    750
    
    
    
    750Series I Issue (no par value; $23,200 stated value; 32,327 shares issued; held by Loews Corporation)
    
    
    
    
    
    
    750Common stock ($2.50 par value; 500,000,000 shares authorized; 258,177,285 and 225,850,270 shares
issued; and 255,953,958 and 223,617,337 shares outstanding)
    
    
    645
    
    
    
    565Additional paid-in capital
    
    
    1,701
    
    
    
    1,031Retained earnings
    
    
    5,601
    
    
    
    5,160Accumulated other comprehensive income
    
    
    650
    
    
    
    841Treasury stock (2,223,327 and 2,232,933 shares), at cost
    
    
    (69
    )
    
    
    (69
    )9,278
    
    
    
    9,028Notes receivable for the issuance of common stock
    
    
    (71
    )
    
    
    (76
    )Total stockholders equity
    
    
    9,207
    
    
    
    8,952Total liabilities and stockholders equity
    
    $
    62,500
    
    
    $
    68,612
 The accompanying Notes are
an integral part of these Consolidated Financial Statements. 96




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##### Table of Contents



CNA Financial Corporation
Consolidated Statements of Cash Flows Years ended December 31
    
    2004
    
    2003
    
    2002(In millions)Cash Flows from Operating Activities:Net income (loss)
    
    $
    441
    
    
    $
    (1,433
    )
    
    $
    155Adjustments to reconcile net income (loss) to net cash flows provided by
operating activities:Cumulative effect of change in accounting principles, net of tax
    
    
    
    
    
    
    
    
    
    
    57Changes in bad debt provision for insurance and reinsurance receivables
    
    
    87
    
    
    
    602
    
    
    
    40Loss on disposal of property and equipment
    
    
    36
    
    
    
    22
    
    
    
    24Minority interest
    
    
    27
    
    
    
    (6
    )
    
    
    26Deferred income tax provision
    
    
    35
    
    
    
    67
    
    
    
    7Net purchases of trading securities
    
    
    (5
    )
    
    
    
    
    
    
    Realized investment (gains) losses, net of participating
policyholders and minority interests
    
    
    248
    
    
    
    (460
    )
    
    
    252Equity method (income) loss
    
    
    (214
    )
    
    
    (220
    )
    
    
    25Realized loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    37Amortization of bond (discount) premium
    
    
    9
    
    
    
    (79
    )
    
    
    (143
    )Depreciation
    
    
    75
    
    
    
    86
    
    
    
    98Changes in:Receivables, net
    
    
    (439
    )
    
    
    (3,529
    )
    
    
    995Deferred acquisition costs
    
    
    194
    
    
    
    (62
    )
    
    
    (162
    )Accrued investment income
    
    
    (12
    )
    
    
    (49
    )
    
    
    69Federal income taxes recoverable/payable
    
    
    596
    
    
    
    (642
    )
    
    
    655Prepaid reinsurance premiums
    
    
    233
    
    
    
    (15
    )
    
    
    (124
    )Reinsurance balances payable
    
    
    (355
    )
    
    
    670
    
    
    
    145Insurance reserves
    
    
    766
    
    
    
    6,818
    
    
    
    (931
    )Other, net
    
    
    (115
    )
    
    
    (10
    )
    
    
    (185
    )Total adjustments
    
    
    1,166
    
    
    
    3,193
    
    
    
    885Net cash flows provided by operating activities
    
    $
    1,607
    
    
    $
    1,760
    
    
    $
    1,040Cash Flows from Investing Activities:Purchases of fixed maturity securities
    
    $
    (58,963
    )
    
    $
    (61,419
    )
    
    $
    (63,167
    )Proceeds from fixed maturity securities:Sales
    
    
    48,678
    
    
    
    52,805
    
    
    
    61,919Maturities, calls and redemptions
    
    
    4,929
    
    
    
    6,435
    
    
    
    3,108Purchases of equity securities
    
    
    (625
    )
    
    
    (281
    )
    
    
    (814
    )Proceeds from sales of equity securities
    
    
    787
    
    
    
    578
    
    
    
    1,197Purchases of mortgage loans and real estate
    
    
    (27
    )
    
    
    
    
    
    
    Change in short term investments
    
    
    2,044
    
    
    
    (845
    )
    
    
    (3,249
    )Change in collateral on loaned securities and derivatives
    
    
    476
    
    
    
    (111
    )
    
    
    (371
    )Change in other investments
    
    
    100
    
    
    
    300
    
    
    
    167Purchases of property and equipment
    
    
    (41
    )
    
    
    (65
    )
    
    
    (88
    )Dispositions
    
    
    647
    
    
    
    422
    
    
    
    (178
    )Other, net
    
    
    (24
    )
    
    
    48
    
    
    
    (12
    )Net cash flows used by investing activities
    
    $
    (2,019
    )
    
    $
    (2,133
    )
    
    $
    (1,488
    )
   97




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##### Table of Contents



2004
    
    2003
    
    2002Cash Flows from Financing Activities:Issuance of preferred stock
    
    $
    
    
    
    $
    750
    
    
    $
    750Principal payments on debt
    
    
    (619
    )
    
    
    (387
    )
    
    
    (341
    )Proceeds from issuance of debt
    
    
    972
    
    
    
    
    
    
    
    65Receipt (return) of policyholder account balances on investment contracts
    
    
    10
    
    
    
    25
    
    
    
    (44
    )Receipts from investment contracts credited to policyholder account balances
    
    
    
    
    
    
    1
    
    
    
    1Other
    
    
    5
    
    
    
    (3
    )
    
    
    1Net cash flows provided by financing activities
    
    
    368
    
    
    
    386
    
    
    
    432Net change in cash
    
    
    (44
    )
    
    
    13
    
    
    
    (16
    )Cash, beginning of year
    
    
    139
    
    
    
    126
    
    
    
    142Cash, end of year
    
    $
    95
    
    
    $
    139
    
    
    $
    126Supplemental Disclosures of Cash Flow Information:Cash paid (received):Interest
    
    $
    216
    
    
    $
    134
    
    
    $
    195Federal income taxes
    
    
    (627
    )
    
    
    (369
    )
    
    
    (612
    )Non-cash transactions:Notes receivable for the issuance of common stock
    
    
    
    
    
    
    4
    
    
    
    4
 The accompanying Notes are
an integral part of these Consolidated Financial Statements. 98




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##### Table of Contents



CNA Financial Corporation
Consolidated Statements of Stockholders Equity Additional
    
    
    
    
    
    AccumulatedOther
    
    
    
    
    
    NotesReceivable
    
    TotalPreferred
    
    Common
    
    Paid-in
    
    Retained
    
    Comprehensive
    
    Treasury
    
    Related to
    
    Stockholders(In millions)
    
    Stock
    
    Stock
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    Stock
    
    Common Stock
    
    EquityBalance, January 1, 2002
    
    $
    
    
    
    $
    565
    
    
    $
    1,031
    
    
    $
    6,438
    
    
    $
    226
    
    
    $
    (70
    )
    
    $
    (68
    )
    
    $
    8,122Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    378
    
    
    
    
    
    
    
    
    
    
    
    378Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    533Issuance of Series H preferred stock
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Increase in notes receivable
related to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Balance, December 31, 2002
    
    
    750
    
    
    
    565
    
    
    
    1,031
    
    
    
    6,593
    
    
    
    604
    
    
    
    (70
    )
    
    
    (72
    )
    
    
    9,401Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,433
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,433
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    237Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,196
    )Issuance of Series I preferred stock
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Increase in notes receivable
related to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Balance, December 31, 2003
    
    
    1,500
    
    
    
    565
    
    
    
    1,031
    
    
    
    5,160
    
    
    
    841
    
    
    
    (69
    )
    
    
    (76
    )
    
    
    8,952Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    441
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    441Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (191
    )
    
    
    
    
    
    
    
    
    
    
    (191
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250Conversion of Series I preferred
stock to common stock
    
    
    (750
    )
    
    
    80
    
    
    
    670
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Decrease in notes receivable
related to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Balance, December 31, 2004
    
    $
    750
    
    
    $
    645
    
    
    $
    1,701
    
    
    $
    5,601
    
    
    $
    650
    
    
    $
    (69
    )
    
    $
    (71
    )
    
    $
    9,207
 The accompanying Notes are an integral part of these Consolidated Financial Statements. 99




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##### Table of Contents



Notes to Consolidated Financial Statements Note A. Summary of Significant Accounting Policies Basis of Presentation The Consolidated Financial Statements include the accounts of CNA Financial Corporation (CNAF) and
its controlled subsidiaries. Collectively, CNAF and its subsidiaries are referred to as CNA or the
Company. CNAs property and casualty and the remaining life and group insurance operations are
primarily conducted by Continental Casualty Company (CCC), The Continental Insurance Company (CIC)
and Continental Assurance Company (CAC). Loews Corporation (Loews) owned approximately 91% of the
outstanding common stock and 100% of the Series H preferred stock of CNAF as of December 31, 2004. The Companys individual life insurance business, including its previously wholly owned subsidiary
Valley Forge Life Insurance Company (VFL), was sold on April 30, 2004 to Swiss Re Life & Health
America Inc. (Swiss Re). The results of the individual life insurance business sold through the
date of sale are included in the Consolidated Statement of Operations for the years ended December
31, 2004, 2003 and 2002. See Note P for further information. CNA Group Life Assurance Company (CNAGLA) was sold to Hartford Financial Services Group, Inc. on
December 31, 2003. The results of the group benefits business sold are included in the Consolidated
Statement of Operations for the years ended December 31, 2003 and 2002. See Note P for further
information. The accompanying Consolidated Financial Statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (GAAP). All significant intercompany
amounts have been eliminated. Certain amounts applicable to prior years have been conformed to the
current year presentation. The preparation of consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the Consolidated Financial
Statements and the reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates. Business As a result of the Companys decisions to focus on core property and casualty operations and to
exit certain businesses, the Company revised its reportable segment structure in the first quarter
of 2004 to reflect the changes in its core operations and how management makes business decisions.
CNAs core property and casualty insurance operations are now reported in two business segments:
Standard Lines and Specialty Lines. CNAs non-core operations are managed in two segments: Life
and Group Non-Core and Corporate and Other Non-Core. Prior period segment disclosures have been
conformed to the current year presentation. CNA serves a wide variety of customers, including small, medium and large businesses; insurance
companies; associations; professionals; and groups and individuals with a broad range of insurance
and risk management products and services. Core insurance products include property and casualty coverages. Non-core insurance products,
which primarily have been sold or placed in run-off as discussed above, include life, accident, and
health insurance; retirement products and annuities; and property and casualty reinsurance. CNA
services include risk management, information services, healthcare claims management, and claims
administration. CNAs products and services are marketed through independent agents, brokers,
managing general agents and direct sales. 100




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##### Table of Contents



Insurance Operations Premiums:Insurance premiums on property and casualty and accident and health insurance contracts
are recognized in proportion to the underlying risk insured which principally are earned ratably
over the duration of the policies after deductions for ceded insurance premiums. The reserve for
unearned premiums on these contracts represents the portion of premiums written relating to the
unexpired terms of coverage. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of
balances due currently or in the future from insureds, including amounts due from insureds related
to losses under high deductible policies, managements experience and current economic conditions. Property and casualty contracts that are retrospectively rated contain provisions that result in an
adjustment to the initial policy premium depending on the contract provisions and loss experience
of the insured during the experience period. For such contracts, the Company estimates the amount
of ultimate premiums that the Company may earn upon completion of the experience period and
recognizes either an asset or a liability for the difference between the initial policy premium and
the estimated ultimate premium. The Company adjusts such estimated ultimate premium amounts during
the course of the experience period based on actual results to date. The resulting adjustment is
recorded as either a reduction of or an increase to the earned premiums for the period. Revenues on interest-sensitive life insurance contracts are composed of contract charges and fees,
which are recognized over the coverage period. Premiums for other life insurance products and
annuities are recognized as revenue when due after deductions for ceded insurance premiums. Claim and claim adjustment expense reserves:Claim and claim adjustment expense reserves, except
reserves for structured settlements not associated with asbestos and environmental pollution and
mass tort (APMT), workers compensation lifetime claims and accident and health claims, are not
discounted and are based on 1) case basis estimates for losses reported on direct business,
adjusted in the aggregate for ultimate loss expectations; 2) estimates of incurred but not reported
losses; 3) estimates of losses on assumed reinsurance; 4) estimates of future expenses to be
incurred in the settlement of claims; and 5) estimates of salvage and subrogation recoveries and 6)
estimates of amounts due from insureds related to losses under high deductible policies.
Management considers current conditions and trends as well as past Company and industry experience
in establishing these estimates. The effects of inflation, which can be significant, are
implicitly considered in the reserving process and are part of the recorded reserve balance. Ceded
claim and claim adjustment expense reserves are reported as a component of reinsurance receivables
in the Consolidated Balance Sheets. Structured settlements have been negotiated for certain property and casualty insurance claims.
Structured settlements are agreements to provide fixed periodic payments to claimants. Certain
structured settlements are funded by annuities purchased from CAC for which the related annuity
obligations are reported in future policy benefits reserves. Obligations for structured
settlements not funded by annuities are included in claim and claim adjustment expense reserves and
carried at present values determined using interest rates ranging from 4.6% to 7.5% at December 31,
2004 and 2003. At December 31, 2004 and 2003, the discounted reserves for unfunded structured
settlements were $872 million and $898 million, net of discount of $1,367 million and $1,429
million. Workers compensation lifetime claim reserves and accident and health claim reserves are calculated
using mortality and morbidity assumptions based on Company and industry experience, and are
discounted at interest rates that range from 3.5% to 6.5% at December 31, 2004 and 2003. At
December 31, 2004 and 2003, such discounted reserves totaled $1,893 million and $2,835 million, net
of discount of $460 million and $851 million. Future policy benefits reserves:Reserves for long term care products are computed using the net
level premium method, which incorporates actuarial assumptions as to interest rates, mortality,
morbidity, persistency, withdrawals and expenses. Actuarial assumptions generally vary by plan,
age at issue and policy duration, and include a margin for adverse deviation. Interest rates range
from 6% to 8.6% at December 31, 2004 and 2003, and mortality, morbidity and withdrawal assumptions
are based on Company and industry experience prevailing at the time of
issue. Expense assumptions include the estimated effects of inflation and expenses to be incurred
beyond the premium paying period. The net reserves for traditional life insurance products (whole
and term life products) 101




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##### Table of Contents



including interest-sensitive contracts were ceded on a 100% indemnity
reinsurance basis to Swiss Re in connection with the sale of the individual life insurance
business. See Note P for additional information. Policyholders funds reserves:Policyholders funds reserves include reserves for universal life
insurance contracts and investment contracts without life contingencies. The liability for policy
benefits for universal life-type contracts is equal to the balance that accrues to the benefit of
policyholders, including credited interest, amounts that have been assessed to compensate the
Company for services to be performed over future periods, and any amounts previously assessed
against policyholders that are refundable on termination of the contract. For investment
contracts, policyholder liabilities are equal to the accumulated policy account values, which
consist of an accumulation of deposit payments plus credited interest, less withdrawals and amounts
assessed through the end of the period. Guaranty fund and other insurance-related assessments:Liabilities for guaranty fund and other
insurance-related assessments are accrued when an assessment is probable, when it can be reasonably
estimated, and when the event obligating the entity to pay an imposed or probable assessment has
occurred. Liabilities for guaranty funds and other insurance-related assessments are not
discounted and are included as part of other liabilities in the Consolidated Balance Sheets. As of
December 31, 2004 and 2003, the liability balance was $67 million and $70 million. As of December
31, 2004 and 2003, included in other assets were $9 million and $7 million of related assets for
premium tax offsets. The related asset is limited to the amount that is able to be assessed on
future premium collections or policy surcharges from business written or committed to be written. Reinsurance:Amounts recoverable from reinsurers are estimated in a manner consistent with claim
and claim adjustment expense reserves or future policy benefits reserves and are reported as
receivables in the Consolidated Balance Sheets. The cost of reinsurance is primarily accounted for
over the life of the underlying reinsured policies using assumptions consistent with those used to
account for the underlying policies. The ceding of insurance does not discharge the primary
liability of the Company. An estimated allowance for doubtful accounts is recorded on the basis of
periodic evaluations of balances due from reinsurers, reinsurer solvency, managements experience
and current economic conditions. Reinsurance contracts that do not effectively transfer the underlying economic risk of loss on
policies written by the Company are recorded using the deposit method of accounting, which requires
that premium paid or received by the ceding company or assuming company be accounted for as a
deposit asset or liability. The Company primarily records these deposits as either reinsurance
receivables or other assets for ceded recoverables and reinsurance balances payable or other
liabilities for assumed liabilities. At December 31, 2004 and 2003, the Company had approximately
$117 million and $380 million recorded as deposit assets and $156 million and $369 million recorded
as deposit liabilities. Income on reinsurance contracts accounted for under the deposit method is recognized using an
effective yield based on the anticipated timing of payments and the remaining life of the contract.
When the estimate of timing of payments changes, the effective yield is recalculated to reflect
actual payments to date and the estimated timing of future payments. The deposit asset or
liability is adjusted to the amount that would have existed had the new effective yield been
applied since the inception of the contract. This adjustment is reflected in other revenue or
other operating expense as appropriate. In 2004, the expenses incurred related to uncollectible reinsurance receivables were reclassified
from Other operating expenses to Insurance claims and policyholders benefits on the
Consolidated Statements of Operations. Prior period amounts have been reclassified to conform to
the current year presentation. This reclassification had no impact on net income (loss) in any
period. Participating insurance:Policyholder dividends are accrued using an estimate of the amount to be
paid based on underlying contractual obligations under policies and applicable state laws. When
limitations exist on the amount of
net income from participating life insurance contracts that may be distributed to policyholders,
the policyholders share of net income on those contracts that cannot be distributed is excluded
from stockholders equity by a charge to operations and the establishment of a corresponding
liability. 102




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##### Table of Contents



Deferred acquisition costs:Costs, including commissions, premium taxes and certain underwriting
and policy issuance costs which vary with and are related primarily to the acquisition of property
and casualty insurance business, are deferred and amortized ratably over the period the related
premiums are earned. Anticipated investment income is considered in the determination of the
recoverability of deferred acquisition costs. The excess of first-year commissions over renewal commissions and other first-year costs of
acquiring life insurance business, such as agency and policy issuance expenses, which vary with and
are related primarily to the production of new and renewal business, have been deferred and are
amortized with interest over the expected life of the related contracts. The excess of first-year
ceded expense allowances over renewal ceded expense allowances reduces applicable unamortized
deferred acquisition costs. Deferred acquisition costs related to non-participating traditional life insurance and accident and
health insurance are amortized over the premium-paying period of the related policies using
assumptions consistent with those used for computing future policy benefits reserves for such
contracts. Assumptions as to anticipated premiums are made at the date of policy issuance or
acquisition and are consistently applied during the lives of the contracts. Deviations from
estimated experience are included in results of operations when they occur. For these contracts,
the amortization period is typically the estimated life of the policy. For universal life and cash value annuity contracts, the amortization of deferred acquisition costs
is recorded in proportion to the present value of estimated gross margins or profits. The gross
margins or profits result from actual earned interest minus actual credited interest, actual costs
of insurance (mortality charges) minus expected mortality, actual expense charges minus expected
maintenance expenses and surrender charges. Amortization interest rates are based on rates in
effect at the inception or acquisition of the contracts or the latest revised rate applied to the
remaining benefit period, according to product line. Actual gross margins or profits can vary from
the Companys estimates resulting in increases or decreases in the rate of amortization. When
appropriate, the Company revises its assumptions of the estimated gross margins or profits of these
contracts, and the cumulative amortization is re-estimated and adjusted through current results of
operations. To the extent that unrealized gains or losses on available-for-sale securities would
result in an adjustment of deferred acquisition costs had they actually been realized, an
adjustment is recorded to deferred acquisition costs and to unrealized investment gains or losses
within stockholders equity. Deferred acquisition costs are recorded net of ceding commissions and other ceded acquisition
costs. The Company evaluates deferred acquisition costs for recoverability. Adjustments, if
necessary, are recorded in current results of operations. Investments in life settlement contracts and related revenue recognition:The Company has
purchased investments in life settlement contracts. Under a life settlement contract, CNA obtains
the rights of being the owner and beneficiary to an underlying life insurance policy. The carrying
value of each contract at purchase and at the end of each reporting period is equal to the cash
surrender value of the policy in accordance with Financial Accounting Standards Board (FASB)
Technical Bulletin 85-4 Accounting for Purchases of Life Insurance (FTB 85-4). Amounts
paid to purchase these contracts that are in excess of the cash surrender value, at the date of
purchase, were expensed immediately. Periodic maintenance costs, such as premiums, necessary to
keep the underlying policy inforce are expensed as incurred and are included in other operating
expenses. Revenue is recognized and included in other revenue in the Consolidated Statements of
Operations when the life insurance policy underlying the life settlement contract matures. Separate Account Business Separate account assets and liabilities represent contract holder funds related to investment and
annuity products, which are segregated into accounts with specific underlying investment
objectives. In 2003 and 2002, separate account balances included funds with balances accruing
directly to the contract holders and also funds with performance measures guaranteed by the
Company. Net income accruing to the Company related to the separate accounts, consisting of fee
revenue and investment results in excess of guaranteed returns, were primarily included within
other revenue in the Consolidated Statements of Operations. 103




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##### Table of Contents



In July of 2003, the Accounting Standards Executive Committee (AcSEC) of the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position 03-01, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts (SOP 03-01). SOP 03-01 provides guidance on accounting and reporting by
insurance enterprises for certain nontraditional long-duration contracts and for separate accounts.
SOP 03-01 was effective for financial statements for fiscal years beginning after December 15,
2003. SOP 03-01 did not allow retroactive application to prior years financial statements. CNA
adopted SOP 03-01 at January 1, 2004. The initial adoption of SOP 03-01 did not have a significant
impact on the results of operations or equity of the Company, but did affect the classification and
presentation of certain balance sheet and income statement items. Under SOP 03-01, the main criterion that needs to be satisfied for separate account presentation is
that results of the investments made by the separate accounts must be directly passed through to
the individual contract holders. Certain of CNAs separate accounts have guaranteed returns not
related to investment performance whereby the contract holders do not bear the losses or receive
the gains from the investment performance; rather, amounts less than or in excess of the guaranteed
amounts accrue to CNA. Upon adoption of SOP 03-01, these separate accounts did not meet the
requirements of SOP 03-01 for separate account presentation. Therefore, the assets supporting these
separate accounts are reflected within general account investments and the related liabilities
within insurance reserves as of December 31, 2004. SOP 03-01 specifically precludes reclassifying
balances for years prior to adoption. The adoption of SOP 03-01 did not result in a net impact to total assets, total liabilities or
shareholders equity. The difference between assets and liabilities as reflected within the table
below, relates to the net equity of the above-referenced separate accounts which accrues to CNA, as
discussed above. Prior to adoption of SOP 03-01, this equity amount was presented as Other Assets
and equity within the consolidated financial statements. Following adoption of SOP 03-01, the
Other Assets amount has been replaced with the actual underlying investments that are now included
within the general account and are reported based on their investment classification, and the
offsetting equity impact is unchanged. From an income statement perspective, SOP 03-01 did not impact net income; however, it required a
reclassification within the income statement. Prior to the adoption of SOP 03-01, the net results
of the separate accounts were primarily included in Other Revenue. Upon adopting SOP 03-01,
premiums, benefits, net investment income and realized gains are included within their natural line
items. Specifically related to the indexed group annuity contracts, the underlying portfolio
consists of limited partnership investments and a trading portfolio which are classified as held
for trading purposes and are carried at fair value, with both the net realized and unrealized gains
(losses) included within net investment income in the Consolidated Statement of Operations. 104




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##### Table of Contents



The following table provides the balance sheet presentation of assets and liabilities for certain
guaranteed investment contracts and indexed group annuity contracts upon adoption of SOP 03-01,
including the classification of the indexed group annuity contract investments as trading
securities. (In millions)
    
    December 31, 2004
    
    January 1, 2004 (a)AssetsInvestments:Fixed maturity securities, available-for-sale
    
    $
    797
    
    
    $
    1,220Fixed maturity securities, trading
    
    
    350
    
    
    
    304Equity securities available-for-sale
    
    
    8
    
    
    
    4Equity securities trading
    
    
    39
    
    
    
    Limited partnerships
    
    
    351
    
    
    
    419Derivatives
    
    
    2
    
    
    
    Short term investments, available-for-sale
    
    
    17
    
    
    
    55Short term investments, trading
    
    
    459
    
    
    
    414Total investments
    
    
    2,023
    
    
    
    2,416Accrued investment income
    
    
    9
    
    
    
    13Receivables for securities sold
    
    
    189
    
    
    
    97Other assets
    
    
    1
    
    
    
    1Total assets
    
    $
    2,222
    
    
    $
    2,527LiabilitiesLiabilities:Insurance reserves:Claim and claim adjustment expense
    
    $
    1
    
    
    $
    1Future policy benefits
    
    
    522
    
    
    
    617Policyholders funds
    
    
    1,205
    
    
    
    1,324Collateral on loaned securities and derivatives
    
    
    
    
    
    
    17Payables for securities purchased
    
    
    102
    
    
    
    43Other liabilities
    
    
    87
    
    
    
    47Total liabilities
    
    $
    1,917
    
    
    $
    2,049
  (a)
    Includes assets and liabilities of the individual life business sold on April 30,
2004. See Note N for further information. The Company continues to have variable annuity contracts issued by CAC that meet the criteria
for separate account presentation. The assets and liabilities of these contracts are legally
segregated and reported as assets and liabilities of the separate account business. Substantially
all assets of the separate account business are carried at fair value. Separate account
liabilities are carried at contract values. Investments Valuation of investments:CNA classifies its fixed maturity securities (bonds and redeemable
preferred stocks) and its equity securities as either available-for-sale or trading, and as such,
they are carried at fair value. During 2004, the Company has designated certain new purchases
related to a specific investment strategy, that primarily includes convertible bond securities, as
held for trading purposes. In addition, upon adoption of SOP 03-01, certain securities were
designated as held for trading purposes within the General Account. Changes
in fair value of trading securities are reported within net investment income. The amortized cost of fixed
maturity securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to
maturity, which are included in net investment income. Changes in fair value related to
available-for-sale securities are reported as a component of other comprehensive income. Investments are
written down to fair value and losses are recognized in income when a decline in value is
determined to be other-than-temporary. For asset-backed securities included in fixed maturity securities, the Company recognizes income
using an effective yield based on anticipated prepayments and the estimated economic life of the
securities. When estimates of 105




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prepayments change, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The net investment in the securities is
adjusted to the amount that would have existed had the new effective yield been applied since the
acquisition of the securities. Such adjustments are reflected in net investment income. The Companys limited partnership investments are recorded at fair value and typically reflect a
reporting lag of up to three months. Fair value represents CNAs equity in the partnerships net
assets as determined by the General Partner. Changes in fair value, which represents changes in
partnerships net assets, are recorded within net investment income. The majority of the limited
partnerships invest in a substantial number of securities that are readily marketable. The Company
is primarily a passive investor in such partnerships and does not have influence over the
partnerships management, who are committed to operate them according to established guidelines and
strategies. These strategies may include the use of leverage and hedging techniques that
potentially introduce more volatility and risk to the partnerships. In accordance with FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51 (FIN 46R), during 2004, the Company consolidated two limited partnerships which were
previously accounted for using the equity method. The net assets of the two limited partnerships
of $113 million are reflected under their respective asset categories on the Companys Consolidated
Balance Sheets. Cash equivalents are short-term, highly liquid investments that are both readily convertible into
known amounts of cash and so near to maturity that they present insignificant risk of changes in
value due to changing interest rates. Other invested assets include certain derivative securities, mortgage loans, real estate and policy
loans. Investments in derivative securities are carried at fair value with changes in fair value
reported as a component of realized gains or losses or other comprehensive income, depending on
their hedge designation. Changes in the fair value of derivative securities which are not
designated as hedges, are reported as a component of realized gains or losses. Mortgage loans are
carried at unpaid principal balances, including unamortized premium or discount. Real estate is
carried at depreciated cost. Policy loans are carried at unpaid balances. Short term investments
are generally carried at fair value, which approximates amortized cost. Accumulated depreciation
for mortgage loans and real estate was $12 million and $10 million at December 31, 2004 and 2003. Realized investment gains and losses:All securities sold resulting in investment gains and losses
are recorded on the trade date. Realized investment gains and losses are determined on the basis of
the cost or amortized cost of the specific securities sold. Equity in unconsolidated affiliates:CNA uses the equity method of accounting for investments in
companies in which its ownership interest of the voting shares of an investee company enables CNA
to influence the operating or financial decisions of the investee company, but CNAs interest in
the investee does not require consolidation under Accounting Research Bulletin No. 51
Consolidated Financial Statements (ARB 51) or FIN 46R. FIN 46R has
changed the basis of consolidation from voting control to a broader consolidation model based on
risks and rewards. CNAs proportionate share of equity in net income of these unconsolidated
affiliates is reported in other revenues. Securities lending activities:CNA lends securities to unrelated parties, primarily major
brokerage firms. Borrowers of these securities must deposit collateral with CNA of at least 102%
of the fair value of the securities loaned if the collateral is cash or securities. CNA maintains
effective control over all loaned securities and, therefore, continues to report such securities as
fixed maturity securities in the Consolidated Balance Sheets. Cash collateral received on these transactions is invested in short term investments with an
offsetting liability recognized for the obligation to return the collateral. Non-cash collateral,
such as securities or letters of credit, received by the Company are not reflected as assets of the
Company as there exists no right to sell or repledge the collateral. The fair value of collateral
held and included in short term investments was $918 million and $430 million at December 31, 2004
and 2003. The fair value of non-cash collateral was $3,783 million and $505 million at December
31, 2004 and 2003. 106




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Derivative Financial Instruments All investments in derivatives are recorded at fair value. A derivative is typically defined as an
instrument whose value is derived from an underlying instrument, index or rate, has a notional
amount, requires little or no initial investment and can be net settled. Derivatives include, but
are not limited to, the following types of financial instruments: interest rate swaps, interest
rate caps and floors, put and call options, warrants, futures, forwards, commitments to purchase
securities, and combinations of the foregoing. Derivatives embedded within non-derivative
instruments (such as call options embedded in convertible bonds) must be split from the host
instrument when the embedded derivative is not clearly and closely related to the host instrument.
Collateralized debt obligations (CDO) represent a credit enhancement product that is typically
structured in the form of a swap. The Company has determined that this product is a derivative
under Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). Changes in the estimated fair value of CDOs, like other
derivative financial instruments with no hedge designation, are recorded in realized gains or
losses as appropriate. The net impact from CDOs was a realized gain of $5 million for the year
ended December 31, 2004. The net impact of CDOs were realized losses of $1 million and $6 million
for the years ended December 31, 2003 and 2002. The Company no longer issues this product. Synthetic guaranteed investment contracts (GIC) are guaranteed investment contracts that simulate
the performance of a traditional GIC through the use of financial instruments. These contracts are
accounted for as derivative financial instruments. A key difference between a synthetic GIC and a
traditional GIC is that the contract owner owns the financial instruments underlying the synthetic
GIC; whereas, the contract owner owns only the contract itself with a traditional GIC. The Company
mitigates its exposure under these contracts by maintaining the ability to reset the crediting rate
on a monthly/quarterly basis. This rate reset effectively passes any cash flow volatility and
asset underperformance back to the contract owner. The Company no longer issues this product. The Companys derivatives are reported as other invested assets, with the exception of CDOs and
synthetic GICs, which are reported as other assets and/or other liabilities. Embedded derivative
instruments subject to bifurcation are reported together with the host contract, at fair value. If
certain criteria are met, a derivative may be specifically designated as a hedge of exposures to
changes in fair value, cash flows or foreign currency exchange rates. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative and the nature of
any hedge designation thereon. The Companys accounting for changes in the fair value of general account derivatives is as
follows: Nature of Hedge Designation
    
    Derivative's Change in Fair Value Reflected In:No hedge designation
    
    Realized investment gains or lossesFair value
    
    Realized investment gains or losses, along
with the change in fair value of the hedged
asset or liabilityCash flow
    
    Other comprehensive income, with subsequent
reclassification to earnings when the hedged
transaction, asset or liability impacts
earningsForeign currency
    
    Consistent with fair value or cash flow above,
depending on the nature of the hedging
relationship
 Changes in the fair value of derivatives held in the separate accounts are reflected in separate
account earnings. Because separate account investments are generally carried at fair value with
changes therein reflected in separate account earnings, hedge accounting is generally not
applicable to separate account derivatives. The Company uses investment derivatives in the normal course of business, primarily to attempt to
reduce its exposure to market risk (principally interest rate risk, equity stock price risk and
foreign currency risk) stemming from various assets and liabilities and credit risk (the ability of
an obligor to make timely payment of principal and/or interest). The Companys principal objective
under such risk strategies is to achieve the desired reduction in economic risk, even if the
position will not receive hedge accounting treatment. 107




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The Companys use of derivatives is limited by statutes and regulations promulgated by the various
regulatory bodies to which it is subject, and by its own derivative policy. The derivative policy
limits the authorization to initiate derivative transactions to certain personnel. The policy
generally prohibits the use of derivatives with a maturity greater than 18 months, unless the
derivative is matched with assets or liabilities having a longer maturity. The policy prohibits
the use of derivatives containing greater than one-to-one leverage with respect to changes in the
underlying price, rate or index. The policy also prohibits the use of borrowed funds, including
funds obtained through repurchase transactions, to engage in derivative transactions. Credit exposure associated with non-performance by the counterparties to derivative instruments is
generally limited to the uncollateralized fair value of the asset related to the instruments
recognized in the Consolidated Balance Sheets. The Company attempts to mitigate the risk of
non-performance by monitoring the creditworthiness of counterparties and diversifying derivatives
to multiple counterparties. The Company generally requires collateral from its derivative
investment counterparties depending on the amount of the exposure and the credit rating of the
counterparty. The Company has exposure to economic losses due to interest rate risk arising from changes in the
level of, or volatility of, interest rates. The Company attempts to mitigate its exposure to
interest rate risk through active portfolio management, which includes rebalancing its existing
portfolios of assets and liabilities, as well as changing the characteristics of investments to be
purchased or sold in the future. In addition, various derivative financial instruments are used to
modify the interest rate risk exposures of certain assets and liabilities. These strategies
include the use of interest rate swaps, interest rate caps and floors, options, futures, forwards
and commitments to purchase securities. These instruments are generally used to lock interest
rates or unrealized gains, to shorten or lengthen durations of fixed maturity securities or
investment contracts, or to hedge (on an economic basis) interest rate risks associated with
investments, variable rate debt and life insurance liabilities. The Company has used these types
of instruments as designated hedges against specific assets or liabilities on an infrequent basis. The Company is exposed to equity price risk as a result of its investment in equity securities and
equity derivatives. Equity price risk results from changes in the level or volatility of equity
prices, which affect the value of equity securities, or instruments that derive their value from
such securities. CNA attempts to mitigate its exposure to such risks by limiting its investment in
any one security or index. The Company may also manage this risk by utilizing instruments such as
options, swaps, futures and collars to protect appreciation in securities held. CNA uses
derivatives in one of its separate accounts to mitigate equity price risk associated with its
indexed group annuity contracts by purchasing Standard & Poors 500® (S&P 500®) index futures
contracts in a notional amount equal to the contract holder liability, which is calculated using
the S&P 500® rate of return. The Company has exposure to credit risk arising from the uncertainty associated with a financial
instrument obligors ability to make timely principal and/or interest payments. The Company
attempts to mitigate this risk by limiting credit concentrations, practicing diversification, and
frequently monitoring the credit quality of issuers and counterparties. In addition the Company
may utilize credit derivatives such as credit default swaps to modify the credit risk inherent in
certain investments. Credit default swaps involve a transfer of credit risk from one party to
another in exchange for periodic payments. The Company infrequently designates these types of
instruments as hedges against specific assets. Foreign exchange rate risk arises from the possibility that changes in foreign currency exchange
rates will impact the fair value of financial instruments denominated in a foreign currency. The
Companys foreign transactions are primarily denominated in Canadian dollars, British pounds and
euros. The Company manages this risk via asset/liability matching and through the use of foreign
currency futures and/or forwards. The Company has infrequently designated these types of
instruments as hedges against specific assets or liabilities. The contractual or notional amounts for derivatives are used to calculate the exchange of
contractual payments under the agreements and are not representative of the potential for gain or
loss on these instruments. Interest rates, equity prices and foreign currency exchange rates
affect the fair value of derivatives. The fair values generally represent the estimated amounts
that CNA would expect to receive or pay upon termination of the contracts at the reporting date.
Dealer quotes are available for substantially all of CNAs derivatives. For derivative instruments
not actively traded, fair values are estimated using values obtained from independent pricing
services, costs to settle or quoted market prices of comparable instruments. 108




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Income Taxes The Company and its eligible subsidiaries are included in the consolidated Federal income tax
return of Loews and its eligible subsidiaries. The Company accounts for income taxes under the
asset and liability method. Under the asset and liability method, deferred income taxes are
recognized for temporary differences between the financial statement and tax return bases of assets
and liabilities. Future tax benefits are recognized to the extent that realization of such
benefits is more likely than not. Property and Equipment Property and equipment are carried at cost less accumulated depreciation. Depreciation is based on
the estimated useful lives of the various classes of property and equipment and is determined
principally on the straight-line method. Goodwill and Other Intangible Assets Goodwill of $146 million as of December 31, 2004 and 2003 represents the excess of purchase price
over fair value of the net assets of acquired entities. Other intangible assets were $16 million
as of December 31, 2004 and 2003. CNA adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS 142) on January 1, 2002. SFAS 142 changed the
accounting for goodwill and indefinite-lived intangible assets from an amortization method to an
impairment-only approach. Goodwill and indefinite-lived intangible assets are tested for
impairment annually or when certain triggering events require such tests. During 2003, the Company sold certain businesses. Accordingly, the goodwill associated with these
sold businesses decreased CNAs goodwill by $2 million in Standard Lines and $1 million in Life and
Group Non-Core and a reduction in CNAs indefinite-lived intangible assets of $4 million in Life
and Group Non-Core. Additionally, a $5 million pretax impairment charge was recorded in Specialty
Lines. During 2002, the Company completed its initial goodwill impairment testing and recorded a $64
million pretax, or $57 million after-tax, impairment charge. In accordance with SFAS 142, the
impairment charge, which consisted of $43 million after-tax ($43 million pretax) charge in Standard
Lines, a $5 million after-tax ($8 million pretax) charge in Specialty Lines, an $8 million
after-tax ($12 million pretax) charge in Life and Group Non-Core, and a $1 million after-tax ($1
million pretax) charge in Corporate and Other Non-Core, was recorded as a cumulative effect of a
change in accounting principle as of January 1, 2002. Any impairment losses incurred after the
initial application of this standard are reported in operating results. Earnings (Loss) per Share Data Earnings (loss) per share available to common stockholders is based on weighted-average outstanding
shares. Basic and diluted earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of shares outstanding for the period of common stock or
common stock equivalents assuming conversion. The weighted average number of shares outstanding
for computing basic and diluted earnings per share was 256.0 million, 227.0 million and 223.6
million for the years ended December 31, 2004, 2003 and 2002. Included in the weighted-average
outstanding shares in 2004 and 2003 is the effect of 32.3 million shares of CNAF common stock
issued on April 20, 2004 in conjunction with the conversion of the $750 million Series I
convertible preferred stock issued in 2003. The effect of the preferred shares has been included in
the weighted average shares since issuance. Diluted earnings per share reflect the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock. For the years ended
December 31, 2004, 2003 and 2002, approximately one million shares attributable to the exercise of
outstanding options were excluded from the calculation of diluted earnings per share because the
exercise price of these options was greater than the average market price of CNA common stock. 109




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The computation of earnings (loss) per share is as follows: Earnings (Loss) per Share Years ended December 31(In millions, except per share amounts)
    
    2004
    
    2003
    
    2002Income (loss) from continuing operations
    
    $
    441
    
    
    $
    (1,433
    )
    
    $
    247Less: undeclared preferred stock dividend
    
    
    (65
    )
    
    
    (60
    )
    
    
    (2
    )Income (loss) from continuing operations available to common stockholders
    
    
    376
    
    
    
    (1,493
    )
    
    
    245Loss from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    (35
    )Cumulative effect of change in accounting principles, net of tax
    
    
    
    
    
    
    
    
    
    
    (57
    )Net income (loss) available to common stockholders
    
    $
    376
    
    
    $
    (1,493
    )
    
    $
    153Weighted-average outstanding common stock and common stock equivalents
    
    
    256.0
    
    
    
    227.0
    
    
    
    223.6Effect of dilutive securities, employee stock options
    
    
    
    
    
    
    
    
    
    
    Adjusted weighted-average outstanding common stock and common stock
equivalents assuming conversions
    
    
    256.0
    
    
    
    227.0
    
    
    
    223.6Basic and diluted earnings (loss) per share available to common stockholders
    
    $
    1.47
    
    
    $
    (6.58
    )
    
    $
    0.68
 The Company has stock-based compensation plans which are detailed in Note J. The Company
applies the intrinsic value method by following Accounting Policy Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations, in
accounting for its stock-based compensation plan. Under the recognition and measurement principles
of APB 25, no stock-based compensation cost has been recognized as the exercise price of the
granted options equaled the market price of the underlying stock at the grant date. The following table illustrates the effect on net income (loss) and earnings (loss) per share data
if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS 123) to stock-based employee compensation under the
Companys stock-based compensation plans. Pro Forma Effect of SFAS 123 on Results Years ended December 31(In millions, except per share amounts)
    
    2004
    
    2003
    
    2002Net income (loss) available to common stockholders
    
    $
    376
    
    
    $
    (1,493
    )
    
    $
    153Less: Total stock-based compensation cost determined under
the fair value method, net of tax
    
    
    (2
    )
    
    
    (2
    )
    
    
    (1
    )Pro forma net income (loss) available to common stockholders
    
    $
    374
    
    
    $
    (1,495
    )
    
    $
    152Basic and diluted earnings (loss) per share, as reported
    
    $
    1.47
    
    
    $
    (6.58
    )
    
    $
    0.68Basic and diluted earnings (loss) per share, pro forma
    
    $
    1.46
    
    
    $
    (6.59
    )
    
    $
    0.67
 Accounting Pronouncements In December of 2003, FASB issued FIN 46R. As per ARB 51, a general rule for preparation of
consolidated financial statements of a parent and its subsidiary is ownership by the parent, either
directly or indirectly, of over fifty percent of the outstanding voting shares of a subsidiary.
However, application of the majority voting interest requirement of ARB 51 to certain types of
entities may not identify the party with a controlling financial interest because the controlling
financial interest may be achieved through arrangements that do not involve voting interest. FIN
46R clarifies applicability of ARB 51 to entities in which the equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial support. FIN 46R
requires an entity to consolidate a variable interest entity (VIE) even though the entity does not,
either directly or indirectly, own over fifty percent of the outstanding voting shares. 110




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FIN 46R was applicable for financial statements issued for reporting periods ended after March 15,
2004. In accordance with FIN 46R, during the fourth quarter of 2004, the Company has consolidated
two limited partnerships. Previously, the limited partnerships were accounted for under the equity
method. Therefore, this change did not have any impact on the results of operations or equity of
the Company. In December of 2003, the FASB revised SFAS No.132, Employers Disclosures about Pensions and
Other Postretirement Benefits(SFAS 132) to require additional disclosures related to pensions
and post retirement benefits. While retaining the existing disclosure requirements for pensions
and postretirement benefits, additional disclosures were required related to pension plan assets,
obligations, contributions and net benefit costs, beginning with fiscal years ending after December
15, 2003. Additional disclosures pertaining to benefit payments were required for fiscal years
ending after June 30, 2004. The SFAS 132 revisions also include additional disclosure requirements
for interim financial reports beginning after December 15, 2003. CNA has implemented the revised
disclosures in its 2004 fiscal year and interim financial statements. In May of 2004, the FASB revised FASB Staff Position (FSP) 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003 and issued FSP 106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2). The FSP provides
accounting guidance to employers who sponsor postretirement health care plans that provide
prescription drug benefits and the prescription drug benefit provided by
the employer is actuarially equivalent to Medicare Part D and qualifies for the subsidy under the
Medicare amendment act. This FSP was effective for the Company as of July 1, 2004, and its adoption
did not have a material impact on the Companys results of operations or equity. In March of 2004, the Emerging Issues Task Force (EITF) reached consensus on the disclosure
guidance provided in EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments (EITF 03-1). Under EITF 03-1 an investment is impaired
if the fair value of the investment is less than its cost including adjustments for amortization,
accretion, foreign exchange, and hedging. An impairment would be considered other-than-temporary
unless a) the investor has the ability and intent to hold an investment for a reasonable period of
time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment and
b) evidence indicating that the cost of the investment is recoverable within a reasonable period of
time outweighs evidence to the contrary. This new guidance for determining whether the decline in
the fair value of the investment is other-than-temporary was to be effective for reporting periods
beginning after June 15, 2004. In September of 2004, the FASB issued FSP EITF Issue 03-1-1, which
suspended the effective date for the measurement and recognition guidance included in EITF Issue
03-1 related to other-than-temporary impairment pending additional implementation guidance.
Pending adoption of the final rule, the Company continues to apply existing accounting literature
for determining when a decline in fair value is other-than-temporary. In December of 2004, FASB issued SFAS 153, Exchanges of Non-Monetary Assets an amendment of APB
Opinion No. 29. SFAS 153 amends the definition of exchange or exchange transaction and
expands the list of transactions that would not meet the definition of non-monetary transfer. SFAS
153 is not expected to have a significant impact on the results of operations or equity of the
Company. In October of 2004, the FASB issued FSP 109-2, Accounting and Disclosure Guidance for the
Foreign Exchange Repatriation Provision within the American Jobs Creation Act of 2004 (AJCA).
AJCA introduces a special one-time dividends received deduction of 85% for the repatriation of
certain foreign earnings. A number of companies are requesting that Congress or the Treasury
Department provide additional clarifying language on key elements of the repatriation provision.
Should Loews, upon consideration of any such potential clarifying language, ultimately elect to
apply the repatriation provision of the AJCA, the CNA Tax Group does not expect that the impact of
such an election would be material to its results of operations or equity. 111




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Note B. Investments The significant components of net investment income are presented in the following table. Net Investment Income Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Fixed maturity securities
    
    $
    1,571
    
    
    $
    1,651
    
    
    $
    1,854Short term investments
    
    
    56
    
    
    
    63
    
    
    
    62Limited partnerships
    
    
    212
    
    
    
    221
    
    
    
    (34
    )Equity securities
    
    
    14
    
    
    
    19
    
    
    
    66Income from trading portfolio (a)
    
    
    110
    
    
    
    
    
    
    
    Interest on funds withheld and other deposits
    
    
    (267
    )
    
    
    (344
    )
    
    
    (239
    )Other
    
    
    18
    
    
    
    85
    
    
    
    81Gross investment income
    
    
    1,714
    
    
    
    1,695
    
    
    
    1,790Investment expenses
    
    
    (40
    )
    
    
    (48
    )
    
    
    (60
    )Net investment income
    
    $
    1,674
    
    
    $
    1,647
    
    
    $
    1,730
  (a)
    The change in net unrealized gains (losses) on trading securities, included in net
investment income, was $2 million for the year ended December 31, 2004. Net realized investment gains (losses) and net change in unrealized appreciation
(depreciation) in investments were as follows: Net Investment Appreciation Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Net realized investment gains (losses):Fixed maturity securities:Gross realized gains
    
    $
    704
    
    
    $
    1,244
    
    
    $
    1,009Gross realized losses
    
    
    (457
    )
    
    
    (807
    )
    
    
    (1,118
    )Net realized gains (losses) on fixed maturity securities
    
    
    247
    
    
    
    437
    
    
    
    (109
    )Equity securities:Gross realized gains
    
    
    225
    
    
    
    143
    
    
    
    251Gross realized losses
    
    
    (23
    )
    
    
    (29
    )
    
    
    (409
    )Net realized gains (losses) on equity securities
    
    
    202
    
    
    
    114
    
    
    
    (158
    )Other, including disposition of businesses, net of participating
policyholders interest
    
    
    (688
    )
    
    
    (87
    )
    
    
    13Net realized investment gains (losses) before allocation to participating
policyholders and minority interests
    
    
    (239
    )
    
    
    464
    
    
    
    (254
    )Allocation to participating policyholders and minority interests
    
    
    (9
    )
    
    
    (4
    )
    
    
    2Net realized investment gains (losses)
    
    
    (248
    )
    
    
    460
    
    
    
    (252
    )Net change in unrealized appreciation (depreciation) in general account investments:Fixed maturity securities
    
    
    (53
    )
    
    
    372
    
    
    
    548Equity securities
    
    
    (98
    )
    
    
    87
    
    
    
    (23
    )Other
    
    
    
    
    
    
    2
    
    
    
    17Total net change in unrealized appreciation (depreciation) in general account
investments
    
    
    (151
    )
    
    
    461
    
    
    
    542Net change in unrealized appreciation (depreciation) on separate accounts and other
    
    
    (70
    )
    
    
    6
    
    
    
    53Allocation to participating policyholders and minority interests
    
    
    19
    
    
    
    (7
    )
    
    
    (19
    )Deferred income tax (expense) benefit
    
    
    55
    
    
    
    (159
    )
    
    
    (182
    )Net change in unrealized appreciation (depreciation) in investments
    
    
    (147
    )
    
    
    301
    
    
    
    394Net
realized gains (losses) and change in unrealized appreciation (depreciation) in
investments
    
    $
    (395
    )
    
    $
    761
    
    
    $
    142
 112




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##### Table of Contents



Investment securities are exposed to various risks, such as interest rate, market and credit.
Due to the level of risk associated with certain investment securities and the level of uncertainty
related to changes in the value of investment securities, it is possible that changes in these risk
factors in the near term could have an adverse material impact on the Companys results of
operations or equity. A primary objective in the management of the fixed maturity and equity portfolios is to maximize
total return relative to underlying liabilities and respective liquidity needs. The Companys
views on the current interest rate environment, tax regulations, asset class valuations, specific
security issuer and broader industry segment conditions, and the domestic and global economic
conditions, are some of the factors that may enter into a decision to move between asset classes.
Based on the Companys consideration of these factors, in the course of normal investment activity
the Company may, in pursuit of the total return objective, be willing to sell securities that, in
its analysis, are overvalued on a risk adjusted basis relative to other opportunities that are
available at the time in the market; in turn the Company may purchase other securities that,
according to its analysis, are undervalued in relation to other securities in the market. In
making these value decisions securities may be bought and sold that shift the investment portfolio
between asset classes. The Company also continually monitors exposure to issuers of securities
held and broader industry sector exposures and may from time to time reduce such exposures based on
its views of a specific issuer or industry sector. These activities could produce realized gains
or losses. The Companys investment policies emphasize high credit quality and diversification by industry,
issuer and issue. Assets supporting interest rate sensitive liabilities are segmented within the
general account to facilitate asset/liability duration management. A significant judgment in the valuation of investments is the determination of when an
other-than-temporary decline in value has occurred. The Company follows a consistent and
systematic process for impairing securities that sustain other-than-temporary declines in value.
The Company has established a committee responsible for the impairment process. This committee,
referred to as the Impairment Committee, is made up of three officers appointed by the Companys
Chief Financial Officer. The Impairment Committee is responsible for analyzing watch list
securities on at least a quarterly basis. The watch list includes individual securities that fall
below certain thresholds or that exhibit evidence of impairment indicators including, but not
limited to, a significant adverse change in the financial condition and near term prospects of the
investment or a significant adverse change in legal factors, the business climate or credit
ratings. When a security is placed on the watch list, it is monitored for further market value changes and
additional news related to the issuers financial condition. The focus is on objective evidence
that may influence the evaluation of impairment factors. The decision to impair a security incorporates both quantitative criteria and qualitative
information. The Impairment Committee considers a number of factors including, but not limited to:
(a) the length of time and the extent to which the fair value has been less than book value, (b)
the financial condition and near term prospects of the issuer, (c) the intent and ability of the
Company to retain its investment for a period of time sufficient to allow for any anticipated
recovery in value, (d) whether the debtor is current on interest and principal payments and (e)
general market conditions and industry or sector specific factors. The Impairment Committees decision to impair a security is primarily based on whether the
securitys fair value is likely to remain significantly below its book value in light of all of the
factors considered. For securities that are impaired, the security is adjusted to fair value and
the resulting losses are recognized in realized gains/losses in the Consolidated Statements of
Operations. Realized investment losses included $93 million, $321 million and $890 million of pretax impairment
losses for the three years ended December 31, 2004, 2003 and 2002. The 2003 and 2002 impairments
were primarily the result of the continued credit deterioration on specific issuers in the bond and
equity markets and the effects on such markets due to the overall slowing of the economy. For the
year ended December 31, 2004, the impairment losses recorded related largely to a $56 million
pretax impairment loss related to loans made under a credit facility to a national contractor, that
are classified as fixed maturity securities. 113




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##### Table of Contents



Other realized investment gains (losses) for the years ended December 31, 2004, 2003 and 2002
include gains and losses related to sales of certain operations or affiliates. See Note P for
further details. The following table provides a summary of fixed maturity and equity securities investments. Summary of Fixed Maturity and Equity Securities Cost or
    
    Gross
    
    Gross Unrealized Losses
    
    EstimatedAmortized
    
    Unrealized
    
    Less than
    
    Greater than
    
    FairDecember 31, 2004(In millions)
    
    Cost
    
    Gains
    
    12 Months
    
    12 Months
    
    ValueFixed maturity securities available-for-sale:U.S. Treasury securities and obligations of
government agencies
    
    $
    4,233
    
    
    $
    126
    
    
    $
    13
    
    
    $
    
    
    
    $
    4,346Asset-backed securities
    
    
    7,706
    
    
    
    105
    
    
    
    19
    
    
    
    4
    
    
    
    7,788States, municipalities and political
subdivisions  tax-exempt
    
    
    8,699
    
    
    
    189
    
    
    
    28
    
    
    
    3
    
    
    
    8,857Corporate securities
    
    
    6,093
    
    
    
    477
    
    
    
    52
    
    
    
    5
    
    
    
    6,513Other debt securities
    
    
    2,769
    
    
    
    295
    
    
    
    11
    
    
    
    
    
    
    
    3,053Redeemable preferred stock
    
    
    142
    
    
    
    6
    
    
    
    
    
    
    
    2
    
    
    
    146Options embedded in convertible debt securities
    
    
    234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234Total fixed maturity securities available-for-sale
    
    
    29,876
    
    
    
    1,198
    
    
    
    123
    
    
    
    14
    
    
    
    30,937Total fixed maturity securities trading
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    390Equity securities available-for-sale:Common stock
    
    
    148
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    260Non-redeemable preferred stock
    
    
    126
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    150Total equity securities available-for-sale
    
    
    274
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    410Total equity securities trading
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Total
    
    $
    30,586
    
    
    $
    1,334
    
    
    $
    123
    
    
    $
    14
    
    
    $
    31,783
 114




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##### Table of Contents



Cost or
    
    Gross
    
    Gross Unrealized Losses
    
    EstimatedAmortized
    
    Unrealized
    
    Less than
    
    Greater than
    
    FairDecember 31, 2003(In millions)
    
    Cost
    
    Gains
    
    12 Months
    
    12 Months
    
    ValueFixed maturity securities:U.S. Treasury securities and
obligations of government
agencies
    
    $
    1,823
    
    
    $
    91
    
    
    $
    10
    
    
    $
    4
    
    
    $
    1,900Asset-backed securities
    
    
    8,634
    
    
    
    146
    
    
    
    22
    
    
    
    1
    
    
    
    8,757States, municipalities and
political subdivisions 
tax-exempt
    
    
    7,787
    
    
    
    207
    
    
    
    22
    
    
    
    2
    
    
    
    7,970Corporate securities
    
    
    6,061
    
    
    
    475
    
    
    
    40
    
    
    
    14
    
    
    
    6,482Other debt securities
    
    
    2,961
    
    
    
    311
    
    
    
    4
    
    
    
    4
    
    
    
    3,264Redeemable preferred stock
    
    
    97
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    104Options embedded in
convertible debt securities
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201Total fixed maturity securities
    
    
    27,564
    
    
    
    1,237
    
    
    
    98
    
    
    
    25
    
    
    
    28,678Equity securities:Common stock
    
    
    163
    
    
    
    222
    
    
    
    2
    
    
    
    
    
    
    
    383Non-redeemable preferred stock
    
    
    130
    
    
    
    16
    
    
    
    2
    
    
    
    
    
    
    
    144Total equity securities
    
    
    293
    
    
    
    238
    
    
    
    4
    
    
    
    
    
    
    
    527Total
    
    $
    27,857
    
    
    $
    1,475
    
    
    $
    102
    
    
    $
    25
    
    
    $
    29,205
 The following tables summarize fixed maturity and equity securities in an unrealized loss
position at December 31, 2004 and 2003, the aggregate fair value and gross unrealized loss by
length of time those securities have been continuously in an unrealized loss position. Unrealized Loss Aging December 31, 2004
    
    December 31, 2003Gross
    
    
    
    
    
    GrossEstimated
    
    Unrealized
    
    Estimated
    
    Unrealized(In millions)
    
    Fair Value
    
    Loss
    
    Fair Value
    
    LossFixed maturity securities:Investment grade:0-6 months
    
    $
    7,742
    
    
    $
    53
    
    
    $
    4,138
    
    
    $
    507-12 months
    
    
    2,448
    
    
    
    59
    
    
    
    834
    
    
    
    3613-24 months
    
    
    368
    
    
    
    12
    
    
    
    76
    
    
    
    11Greater than 24 months
    
    
    2
    
    
    
    
    
    
    
    51
    
    
    
    3Total investment grade
    
    
    10,560
    
    
    
    124
    
    
    
    5,099
    
    
    
    100Non-investment grade:0-6 months
    
    
    188
    
    
    
    7
    
    
    
    134
    
    
    
    57-12 months
    
    
    69
    
    
    
    4
    
    
    
    60
    
    
    
    713-24 months
    
    
    20
    
    
    
    2
    
    
    
    16
    
    
    
    1Greater than 24 months
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    10Total non-investment grade
    
    
    277
    
    
    
    13
    
    
    
    315
    
    
    
    23Total fixed maturity securities
    
    
    10,837
    
    
    
    137
    
    
    
    5,414
    
    
    
    123Equity securities:0-6 months
    
    
    4
    
    
    
    
    
    
    
    23
    
    
    
    27-12 months
    
    
    1
    
    
    
    
    
    
    
    10
    
    
    
    213-24 months
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    Greater than 24 months
    
    
    3
    
    
    
    
    
    
    
    6
    
    
    
    Total equity securities
    
    
    9
    
    
    
    
    
    
    
    42
    
    
    
    4Total fixed maturity and equity securities
    
    $
    10,846
    
    
    $
    137
    
    
    $
    5,456
    
    
    $
    127
 115




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##### Table of Contents



The following tables summarize available-for-sale fixed maturity securities by contract
maturity at December 31, 2004 and 2003. Actual maturities may differ from contractual maturities
because certain securities may be called or prepaid with or without call or prepayment penalties. Contractual Maturity December 31, 2004
    
    December 31, 2003Cost or
    
    Estimated
    
    Cost or
    
    EstimatedAmortized
    
    Fair
    
    Amortized
    
    Fair(In millions)
    
    Cost
    
    Value
    
    Cost
    
    ValueDue in one year or less
    
    $
    1,048
    
    
    $
    1,054
    
    
    $
    275
    
    
    $
    275Due after one year through five years
    
    
    4,433
    
    
    
    4,480
    
    
    
    2,544
    
    
    
    2,605Due after five years through ten years
    
    
    9,238
    
    
    
    9,577
    
    
    
    3,596
    
    
    
    3,886Due after ten years
    
    
    7,451
    
    
    
    8,038
    
    
    
    12,515
    
    
    
    13,155Asset-backed securities
    
    
    7,706
    
    
    
    7,788
    
    
    
    8,634
    
    
    
    8,757Total
    
    $
    29,876
    
    
    $
    30,937
    
    
    $
    27,564
    
    
    $
    28,678
 The carrying value of fixed maturity investments that did not produce income during 2004 and
2003 was $3 million and $41 million. At December 31, 2004 and 2003, no investments, other than
investments in U.S. government agency securities, exceeded 10% of stockholders equity. As of December 31, 2004 and 2003, the Company had committed approximately $104 million and $154
million to future capital calls from various third-party limited partnership investments in
exchange for an ownership interest in the related partnerships. In the normal course of investing activities, CCC had committed approximately $51 million as of
December 31, 2004 and 2003 to future capital calls from certain of its unconsolidated affiliates in
exchange for an ownership interest in such affiliates. Restricted Investments The Company may from time to time invest in securities that may be restricted in whole or in part.
As of December 31, 2004 and 2003, the Company did not hold any significant positions in investments
whose sale was restricted. Cash and securities with carrying values of approximately $2.6 billion and $2.0 billion were
deposited by the Companys insurance subsidiaries under requirements of regulatory authorities as
of December 31, 2004 and 2003. The Companys investments in limited partnerships contain withdrawal provisions that typically
require advanced written notice of up to 90 days for withdrawals. The carrying value of these
investments, reported as a separate line item in the Consolidated Balance Sheets, is $1,549 million
and $1,117 million at December 31, 2004 and 2003. The Company invests in multiple bank loan participations as part of its overall investment strategy
and has committed to additional future purchases and sales. The purchase and sale of these
investments are recorded on the date that the legal agreements are finalized and cash settlement is
made. As of December 31, 2004, the Company had commitments to purchase $41 million and commitments
to sell $2 million of various bank loan participations. Cash and securities with carrying values of approximately $18 million and $23 million were
deposited with financial institutions as collateral for letters of credit as of December 31, 2004
and 2003. In addition, cash and securities were deposited in trusts with financial institutions to
secure reinsurance obligations with various third parties. The carrying values of these deposits
were approximately $329 million and $254 million as of December 31, 2004 and 2003. 116




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##### Table of Contents



During July of 2002, the Company entered into an agreement, whereby the Phoenix Companies, Inc.
acquired the variable life and annuity business of VFL through a coinsurance arrangement, with
modified coinsurance on the VFL separate accounts. Related securities with carrying values of
approximately $492 million were held by the Company and reported in separate account assets in the
Consolidated Balance Sheet at December 31, 2003. VFL was sold in 2004. See Note P for further
details. Note C. Derivative Financial Instruments A summary of the aggregate contractual or notional amounts, estimated fair values and recognized
gains (losses) related to derivative financial instruments follows. Derivative Instruments Contractual/
    
    Estimated
    
    Estimated
    
    RecognizedNotional
    
    Fair Value
    
    Fair Value
    
    GainsAs of and for the year ended December 31, 2004(In millions)
    
    Amount
    
    Asset
    
    (Liability)
    
    (Losses)General accountSwaps
    
    $
    489
    
    
    $
    
    
    
    $
    (8
    )
    
    $
    23Futures purchased
    
    
    1,230
    
    
    
    
    
    
    
    (1
    )
    
    
    96Futures sold, not yet purchased
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    (113
    )Forwards purchased
    
    
    139
    
    
    
    1
    
    
    
    
    
    
    
    5Forwards sold, not yet purchased
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    5Commitments to purchase government and municipal securities
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Equity warrants
    
    
    11
    
    
    
    1
    
    
    
    
    
    
    
    Options purchased
    
    
    103
    
    
    
    1
    
    
    
    
    
    
    
    (1
    )Options written
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    4Collateralized debt obligation liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Options embedded in convertible debt securities
    
    
    701
    
    
    
    234
    
    
    
    
    
    
    
    24Total
    
    $
    2,933
    
    
    $
    237
    
    
    $
    (9
    )
    
    $
    36Separate accountsOptions written
    
    $
    9
    
    
    $
    
    
    
    $
    
    
    
    $
    1Total
    
    $
    9
    
    
    $
    
    
    
    $
    
    
    
    $
    1
 117




---



##### Table of Contents



Contractual/
    
    Estimated
    
    Estimated
    
    RecognizedNotional
    
    Fair Value
    
    Fair Value
    
    GainsAs of and for the year ended December 31, 2003(In millions)
    
    Amount
    
    Asset
    
    (Liability)
    
    (Losses)General accountSwaps
    
    $
    856
    
    
    $
    
    
    
    $
    (5
    )
    
    $
    87Interest rate caps
    
    
    225
    
    
    
    
    
    
    
    
    
    
    
    Futures sold, not yet purchased
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    (9
    )Forwards
    
    
    16
    
    
    
    
    
    
    
    (1
    )
    
    
    2Commitments to purchase government and municipal securities
    
    
    3,318
    
    
    
    12
    
    
    
    
    
    
    
    (1
    )Equity warrants
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    Options purchased
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Options written
    
    
    515
    
    
    
    
    
    
    
    (2
    )
    
    
    Collateralized debt obligation liabilities
    
    
    110
    
    
    
    
    
    
    
    (14
    )
    
    
    (1
    )Synthetic guaranteed investment contracts
    
    
    280
    
    
    
    
    
    
    
    
    
    
    
    Options embedded in convertible debt securities
    
    
    681
    
    
    
    201
    
    
    
    
    
    
    
    36Total
    
    $
    6,034
    
    
    $
    213
    
    
    $
    (22
    )
    
    $
    114Separate accountsFutures purchased
    
    $
    1,106
    
    
    $
    3
    
    
    $
    
    
    
    $
    208Futures sold, not yet purchased
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    Options purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Options written
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    2Total
    
    $
    1,130
    
    
    $
    3
    
    
    $
    
    
    
    $
    209
 Fair Value Hedges The Companys hedging activities that are designated as a hedge for accounting purposes primarily
involve hedging interest rate and foreign currency risks on various assets and liabilities. There
was no gain or loss on the ineffective portion of the fair value hedges for the years ended
December 31, 2004 and 2003, because the Company did not designate any derivatives as fair value
hedges in those years. The ineffective portion of the fair value hedges resulted in a realized
loss of approximately $4 million for the year ended December 31, 2002. Cash Flow Hedges The Company entered into one transaction that was designated as a cash flow hedge for accounting
purposes, hedging interest rate risk on the forecasted payment of interest resulting from the
issuance of fixed rate debt obligations during 2004. Ineffectiveness resulting from this hedge,
recorded in realized gains or losses, was immaterial for the year ended December 31, 2004. For
cash flow hedges of this type, gains and losses on derivative contracts that are reclassified from
accumulated other comprehensive income to current period earnings are included as part of the
interest cost over the forecasted life of the debt. The cash flow hedge resulted in a loss of $4
million which is recorded in other comprehensive income at December 31, 2004. The Company expects
that $0.3 million of the deferred net loss recorded in other comprehensive income will be
reclassified into earnings during the next twelve months. The Company did not designate any
derivative instruments as cash flow hedges during 2003 or 2002. Note D. Financial Instruments In the normal course of business, the Company invests in various financial assets, incurs various
financial liabilities and enters into agreements involving derivative securities. Fair values are disclosed for all financial instruments for which it is practicable to estimate
fair value, whether or not such values are recognized in the Consolidated Balance Sheets.
Management attempts to obtain quoted market prices for these disclosures. Where quoted market
prices are not available, fair values are estimated using present 118




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##### Table of Contents



value or other valuation
techniques. These techniques are significantly affected by managements assumptions, including
discount rates and estimates of future cash flows. Potential taxes and other transaction costs
have not been considered in estimating fair values. The estimates presented herein are not
necessarily indicative of the amounts that CNA would realize in a current market exchange. Non-financial instruments such as real estate, deferred acquisition costs, property and equipment,
deferred income taxes and intangibles, and certain financial instruments such as insurance reserves
and leases are excluded from the fair value disclosures. Therefore, the fair value amounts cannot
be aggregated to determine the underlying economic value of the Company. The carrying amounts reported in the Consolidated Balance Sheets for cash, short term investments,
accrued investment income, receivables for securities sold, federal income taxes
recoverable/payable, collateral on loaned securities and derivatives, payables for securities
purchased, and certain other assets and other liabilities approximate fair value because of the
short term nature of these items. These assets and liabilities are not listed in the following
tables. The following methods and assumptions were used by CNA in estimating the fair value of financial
assets and liabilities. The fair values of fixed maturity and equity securities were based on quoted market prices, where
available. For securities not actively traded, fair values were estimated using values obtained
from independent pricing services or quoted market prices of comparable instruments. The fair values for mortgage loans and policy loans were estimated using discounted cash flows
utilizing interest rates currently offered for similar loans to borrowers of comparable credit
quality. Loans with similar characteristics were aggregated for purposes of these calculations. The fair value of limited partnership investments represents CNAs equity in the partnerships net
assets as determined by the general partner. Valuation techniques to determine fair value of other
invested assets and other separate account business assets consisted of discounting cash flows, obtaining quoted market
prices of the investments and comparing the investments to similar instruments or to the underlying
assets of the investments. The fair values of notes receivable for the issuance of common stock were estimated using
discounted cash flows utilizing interest rates currently offered for obligations securitized with
similar collateral. Premium deposits and annuity contracts were valued based on cash surrender values and the
outstanding fund balances. CNAFs senior notes and debentures were valued based on quoted market prices. The fair value for
other long term debt was estimated using discounted cash flows based on current incremental
borrowing rates for similar borrowing arrangements. The fair values of CDOs were determined largely based on managements estimates using default
probabilities of the debt securities underlying the contract, which were obtained from a rating
agency, the term of each contract, and actual default losses recorded on the contract. The fair values of financial guarantee contracts were estimated using discounted cash flows
utilizing interest rates currently offered for similar contracts. The fair values of guaranteed investment contracts of the separate account business were estimated
using discounted cash flow calculations based on interest rates currently offered for similar
contracts with similar maturities. The fair values of the liabilities for variable separate
account business were based on the quoted market values of the underlying assets of each variable
separate account. The fair values of other separate account liabilities approximate their carrying
value because of their short term nature. 119




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##### Table of Contents



The carrying amount and estimated fair value of the Companys financial instrument assets and
liabilities are listed in the table below. Additional detail related to derivative financial
instruments is also provided in Note C. Financial Assets and Liabilities 2004
    
    2003Estimated
    
    
    
    
    
    EstimatedCarrying
    
    Fair
    
    Carrying
    
    FairDecember 31(In millions)
    
    Amount
    
    Value
    
    Amount
    
    ValueFinancial assetsInvestments:Fixed maturity securities
    
    $
    31,327
    
    
    $
    31,327
    
    
    $
    28,678
    
    
    $
    28,678Equity securities
    
    
    456
    
    
    
    456
    
    
    
    527
    
    
    
    527Mortgage loans
    
    
    
    
    
    
    1
    
    
    
    15
    
    
    
    16Policy loans
    
    
    1
    
    
    
    1
    
    
    
    175
    
    
    
    176Limited partnership investments
    
    
    1,549
    
    
    
    1,549
    
    
    
    1,117
    
    
    
    1,117Other invested assets
    
    
    (4
    )
    
    
    (4
    )
    
    
    40
    
    
    
    40Separate account business:Fixed maturity securities
    
    
    486
    
    
    
    486
    
    
    
    2,114
    
    
    
    2,114Equity securities
    
    
    55
    
    
    
    55
    
    
    
    117
    
    
    
    117Limited partnership investments
    
    
    
    
    
    
    
    
    
    
    419
    
    
    
    419Other
    
    
    
    
    
    
    
    
    
    
    415
    
    
    
    415Notes receivable for the issuance of common stock
    
    
    71
    
    
    
    73
    
    
    
    76
    
    
    
    87Financial liabilitiesPremium deposits and annuity contracts
    
    $
    422
    
    
    $
    428
    
    
    $
    1,282
    
    
    $
    1,261Long term debt
    
    
    1,726
    
    
    
    1,820
    
    
    
    1,641
    
    
    
    1,712Short-term debt
    
    
    531
    
    
    
    531
    
    
    
    263
    
    
    
    263Collateralized debt obligation liabilities
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Financial guarantee contracts
    
    
    45
    
    
    
    45
    
    
    
    50
    
    
    
    50Separate account business:Guaranteed investment contracts
    
    
    
    
    
    
    
    
    
    
    211
    
    
    
    229Variable separate accounts
    
    
    65
    
    
    
    65
    
    
    
    540
    
    
    
    540Other
    
    
    503
    
    
    
    503
    
    
    
    2,449
    
    
    
    2,449
 Note E. Income Taxes CNA and its eligible subsidiaries (CNA Tax Group) are included in the consolidated Federal income
tax return of Loews and its eligible subsidiaries. Loews and CNA have agreed that for each taxable
year, CNA will 1) be paid by Loews the amount, if any, by which the Loews consolidated Federal
income tax liability is reduced by virtue of the inclusion of the CNA Tax Group in the Loews consolidated Federal income tax return, or 2) pay to
Loews an amount, if any, equal to the Federal income tax that would have been payable by the CNA
Tax Group filing a separate consolidated tax return. In the event that Loews should have a net
operating loss in the future computed on the basis of filing a separate consolidated tax return
without the CNA Tax Group, CNA may be required to repay tax recoveries previously received from
Loews. This agreement may be canceled by either party upon 30 days written notice. The Loews consolidated federal income tax returns have been settled with the Internal Revenue
Service (IRS) through the 1997 tax year. The federal income tax returns for 1998 through 2001,
including related carryback claims and prior claims for refund, have been examined and are
currently under review by the Joint Committee on Taxation. Although the Companys ultimate tax
obligation for these years is subject to review and final determination, in the opinion of
management, the outcome of the review and final determination of the Companys ultimate tax
obligation will not have a material effect on the financial condition or results of operations of
the CNA Tax Group. Pending the outcome of the review and final determination of the Companys tax
obligations for these years, interest on any tax refunds net of any tax deficiencies is subject to
computation, review and final determination. The amount of any net refund interest ultimately due
to the Company may have a material impact on 120




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##### Table of Contents



the results of operations in the period in which the
review is finalized. The federal income tax returns for 2002 and 2003 are currently under
examination by the IRS. The Company believes the outcome of the 2002 and 2003 examinations will
not have a material effect on the financial condition or results of operations of the CNA Tax
Group. A reconciliation between CNAs Federal income tax (expense) benefit at statutory rates and the
recorded income tax (expense) benefit, after giving effect to minority interest, but before giving
effect to discontinued operations and the cumulative effects of changes in accounting principles,
is as follows: Tax Reconciliation Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Income tax (expense) benefit at statutory rates
    
    $
    (174
    )
    
    $
    823
    
    
    $
    (110
    )Tax benefit from tax exempt income
    
    
    111
    
    
    
    101
    
    
    
    53Other (expense) benefit, including state income taxes
    
    
    34
    
    
    
    (11
    )
    
    
    (11
    )Income tax (expense) benefit
    
    $
    (29
    )
    
    $
    913
    
    
    $
    (68
    )
 Provision has been made for the expected U.S. Federal income tax liabilities applicable to
undistributed earnings of subsidiaries, except for certain subsidiaries for which the Company
intends to invest the undistributed earnings indefinitely, or recover such undistributed earnings
tax-free. On October 22, 2004, the American Jobs Creation Act (AJCA) was signed into law. The AJCA includes
a provision allowing a deduction of 85% for certain foreign earnings that are repatriated. The
AJCA provides Loews the opportunity to elect to apply this provision to qualifying earnings
repatriations in 2005. Based on the existing language in the AJCA and current guidance, the CNA
Tax Group does not expect to repatriate undistributed earnings. To the extent Congress or the
Treasury Department provides additional clarifying language on key elements of the provision, Loews
will consider the effects, if any, of such information and will re-evaluate, as necessary, its
intentions with respect to the repatriation of certain foreign earnings. Should Loews, upon
consideration of any such potential clarifying language, ultimately elect to apply the repatriation
provision of the AJCA, the CNA Tax Group does not expect that the impact of such an election would
be material to its results of operations. The current and deferred components of CNAs income tax (expense) benefit, excluding taxes on
discontinued operations and the cumulative effects of the changes in accounting principles, are as
follows: Current and Deferred Taxes Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Current tax (expense) benefit
    
    $
    6
    
    
    $
    980
    
    
    $
    (61
    )Deferred tax expense
    
    
    (35
    )
    
    
    (67
    )
    
    
    (7
    )Total income tax (expense) benefit
    
    $
    (29
    )
    
    $
    913
    
    
    $
    (68
    )
 121




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##### Table of Contents



The deferred tax effects of the significant components of CNAs deferred tax assets and
liabilities are set forth in the table below: Components of Net Deferred Tax Asset December 31(In millions)
    
    2004
    
    2003Deferred Tax Assets:Insurance reserves:Property and casualty claim and claim adjustment expense reserves
    
    $
    701
    
    
    $
    669Unearned premium reserves
    
    
    233
    
    
    
    288Life reserves
    
    
    192
    
    
    
    183Other insurance reserves
    
    
    28
    
    
    
    30Receivables
    
    
    309
    
    
    
    288Employee benefits
    
    
    218
    
    
    
    175Life settlement contracts
    
    
    100
    
    
    
    109Investment valuation differences
    
    
    149
    
    
    
    56Net operating loss and tax credits carried forward
    
    
    41
    
    
    
    158Other assets
    
    
    215
    
    
    
    234Gross deferred tax assets
    
    
    2,186
    
    
    
    2,190Valuation allowance
    
    
    (33
    )
    
    
    Deferred tax assets after valuation allowance
    
    
    2,153
    
    
    
    2,190Deferred Tax Liabilities:Deferred acquisition costs
    
    
    (691
    )
    
    
    (769
    )Net unrealized gains
    
    
    (429
    )
    
    
    (508
    )Foreign and other affiliate(s)
    
    
    (207
    )
    
    
    (204
    )Other liabilities
    
    
    (134
    )
    
    
    (109
    )Gross deferred tax liabilities
    
    
    (1,461
    )
    
    
    (1,590
    )Net deferred tax asset
    
    $
    692
    
    
    $
    600
 Although realization of deferred tax assets is not assured, management believes it is more
likely than not that the recognized net deferred tax asset will be realized through future
earnings, including but not limited to future income from continuing operations, reversal of
existing temporary differences, and available tax planning strategies. A valuation allowance of
$33 million (associated with a $41 million gross deferred tax asset on net foreign losses incurred
by certain of the Companys foreign subsidiaries) was established at December 31, 2004 due to the
uncertainty in the ability of the foreign subsidiaries to generate sufficient future income. Note F. Claim and Claim Adjustment Expense Reserves CNAs property and casualty insurance claim and claim adjustment expense reserves represent the
estimated amounts necessary to settle all outstanding claims, including claims that are incurred
but not reported (IBNR) as of the reporting date. The Companys reserve projections are based
primarily on detailed analysis of the facts in each case, CNAs experience with similar cases and
various historical development patterns. Consideration is given to such historical patterns as
field reserving trends and claims settlement practices, loss payments, pending levels of unpaid
claims and product mix, as well as court decisions, economic conditions and public attitudes. All
of these factors can affect the estimation of claim and claim adjustment expense reserves. Establishing claim and claim adjustment expense reserves, including claim and claim adjustment
expense reserves for catastrophic events that have occurred, is an estimation process. Many
factors can ultimately affect the final settlement of a claim and, therefore, the necessary
reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials
and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of
reserving determinations since the longer the span between the incidence of a loss and the payment
or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly,
short-tail claims, such as property damage claims, tend to be more reasonably estimable than
long-tail claims, such as general liability and professional liability claims. Adjustments to
prior year reserve estimates, if necessary, are reflected in the results of operations in the
period that the need for such adjustments is determined. 122




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##### Table of Contents



Catastrophes are an inherent risk of the property and casualty insurance business and have
contributed to material period-to-period fluctuations in the Companys results of operations and/or
equity. The level of catastrophe losses experienced in any period cannot be predicted and can be
material to the results of operations and/or equity of the Company. Catastrophe losses were $278 million, $143 million and $59 million pretax for the years ended
December 31, 2004, 2003 and 2002. The catastrophe losses in 2004 related primarily to Hurricanes
Charley, Frances, Ivan and Jeanne. The catastrophe losses in 2003 related primarily to Hurricane
Claudette, Hurricane Isabel, Texas tornadoes, and Midwest rain storms. The catastrophe losses in
2002 related primarily to the European floods, Hurricane Lili and Tropical Storm Isidore. The table below provides a reconciliation between beginning and ending claim and claim adjustment
expense reserves including claim and claim adjustment expense reserves of the life and group
companies. Reconciliation of Claim and Claim Adjustment Expense Reserves As of and for the years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Reserves, beginning of year:Gross
    
    $
    31,730
    
    
    $
    27,370
    
    
    $
    31,266Ceded
    
    
    14,216
    
    
    
    10,727
    
    
    
    12,105Net reserves, beginning of year
    
    
    17,514
    
    
    
    16,643
    
    
    
    19,161Reduction of net reserves (a)
    
    
    
    
    
    
    
    
    
    
    (1,316
    )Reduction of net reserves (b)
    
    
    
    
    
    
    (1,309
    )
    
    
    Reduction of net reserves (c)
    
    
    (42
    )
    
    
    
    
    
    
    Net incurred claim and claim adjustment expenses:Provision for insured events of current year
    
    
    6,062
    
    
    
    6,745
    
    
    
    8,248Increase in provision for insured events of prior years
    
    
    241
    
    
    
    2,409
    
    
    
    35Amortization of discount
    
    
    135
    
    
    
    115
    
    
    
    72Total net incurred (d)
    
    
    6,438
    
    
    
    9,269
    
    
    
    8,355Net payments attributable to:Current year events
    
    
    1,936
    
    
    
    2,192
    
    
    
    3,137Prior year events
    
    
    4,479
    
    
    
    4,936
    
    
    
    6,553Reinsurance recoverable against net reserve transferred under
retroactive reinsurance agreements (See Note P)
    
    
    (41
    )
    
    
    (39
    )
    
    
    (133
    )Total net payments
    
    
    6,374
    
    
    
    7,089
    
    
    
    9,557Net reserves, end of year
    
    
    17,536
    
    
    
    17,514
    
    
    
    16,643Ceded reserves, end of year
    
    
    13,984
    
    
    
    14,216
    
    
    
    10,727Gross reserves, end of year
    
    $
    31,520
    
    
    $
    31,730
    
    
    $
    27,370
  (a)
    In 2002, the net reserves were reduced by $1,316 million as a result of the sale of CNA
Reinsurance Company Limited (CNA Re U.K.). See Note P for further discussion of this sale.(b)
    In 2003, the net reserves were reduced by $1,309 million as a result of the sale of
CNAGLA. See Note P for further discussion of this sale.(c)
    In 2004, the net reserves were reduced by $42 million as a result of the sale of the
individual life insurance business. See Note P for further discussion of this sale.(d)
    Total net incurred above does not agree to insurance claims and policyholders benefit
as reflected in the Consolidated Statements of Operations due to expenses incurred related
to uncollectible reinsurance receivables and benefit expenses related
to future policy benefits and policyholders funds which
are not reflected in the table above. The changes in provision for insured events of prior years (net prior year claim and claim
adjustment expense reserve development) were as follows: 123




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##### Table of Contents



Reserve Development Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Environmental pollution and mass tort
    
    $
    1
    
    
    $
    153
    
    
    $
    Asbestos
    
    
    54
    
    
    
    642
    
    
    
    Other
    
    
    186
    
    
    
    1,614
    
    
    
    35Total
    
    $
    241
    
    
    $
    2,409
    
    
    $
    35
 The following tables summarize the gross and net carried reserves as of December 31, 2004 and
2003. December 31, 2004 Gross and Net CarriedClaim and Claim Adjustment Expense Reserves Life and
    
    CorporateStandard
    
    Specialty
    
    Group
    
    and Other(In millions)
    
    Lines
    
    Lines
    
    Non-Core
    
    Non-Core
    
    TotalGross Case Reserves
    
    $
    6,904
    
    
    $
    1,659
    
    
    $
    2,800
    
    
    $
    3,803
    
    
    $
    15,166Gross IBNR Reserves
    
    
    7,398
    
    
    
    3,201
    
    
    
    880
    
    
    
    4,875
    
    
    
    16,354Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    14,302
    
    
    $
    4,860
    
    
    $
    3,680
    
    
    $
    8,678
    
    
    $
    31,520Net Case Reserves
    
    $
    4,759
    
    
    $
    1,191
    
    
    $
    1,394
    
    
    $
    1,485
    
    
    $
    8,829Net IBNR Reserves
    
    
    4,544
    
    
    
    2,042
    
    
    
    430
    
    
    
    1,691
    
    
    
    8,707Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    9,303
    
    
    $
    3,233
    
    
    $
    1,824
    
    
    $
    3,176
    
    
    $
    17,536
 December 31, 2003 Gross and Net CarriedClaim and Claim Adjustment Expense Reserves Life and
    
    CorporateStandard
    
    Specialty
    
    Group
    
    and Other(In millions)
    
    Lines
    
    Lines
    
    Non-Core
    
    Non-Core
    
    TotalGross Case Reserves
    
    $
    6,416
    
    
    $
    1,605
    
    
    $
    2,539
    
    
    $
    4,342
    
    
    $
    14,902Gross IBNR Reserves
    
    
    7,866
    
    
    
    2,595
    
    
    
    1,037
    
    
    
    5,330
    
    
    
    16,828Total Gross Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    14,282
    
    
    $
    4,200
    
    
    $
    3,576
    
    
    $
    9,672
    
    
    $
    31,730Net Case Reserves
    
    $
    4,585
    
    
    $
    1,087
    
    
    $
    1,477
    
    
    $
    1,879
    
    
    $
    9,028Net IBNR Reserves
    
    
    4,382
    
    
    
    1,832
    
    
    
    414
    
    
    
    1,858
    
    
    
    8,486Total Net Carried Claim and Claim
Adjustment Expense Reserves
    
    $
    8,967
    
    
    $
    2,919
    
    
    $
    1,891
    
    
    $
    3,737
    
    
    $
    17,514
 124




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##### Table of Contents



The following provides discussion of the Companys Asbestos, Environmental Pollution and
Mass Tort (APMT) and core reserves. APMT Reserves CNAs property and casualty insurance subsidiaries have actual and potential exposures related to
APMT claims. Establishing reserves for APMT claim and claim adjustment expenses is subject to uncertainties that
are greater than those presented by other claims. Traditional actuarial methods and techniques
employed to estimate the ultimate cost of claims for more traditional property and casualty
exposures are less precise in estimating claim and claim adjustment expense reserves for APMT,
particularly in an environment of emerging or potential claims and coverage issues that arise from
industry practices and legal, judicial, and social conditions. Therefore, these traditional
actuarial methods and techniques are necessarily supplemented with additional estimating techniques
and methodologies, many of which involve significant judgments that are required of management.
Accordingly, a high degree of uncertainty remains for the Companys ultimate liability for APMT
claim and claim adjustment expenses. In addition to the difficulties described above, estimating the ultimate cost of both reported and
unreported APMT claims is subject to a higher degree of variability due to a number of additional
factors, including among others: the number and outcome of direct actions against the Company;
coverage issues, including whether certain costs are covered under the policies and whether policy
limits apply; allocation of liability among numerous parties, some of whom may be in bankruptcy
proceedings, and in particular the application of joint and several liability to specific
insurers on a risk; inconsistent court decisions and developing legal theories; increasingly
aggressive tactics of plaintiffs lawyers; the risks and lack of predictability inherent in major
litigation; increased filings of claims in certain states; enactment of national federal
legislation to address asbestos claims; a further increase in asbestos and environmental
pollution claims which cannot now be anticipated; increase in number of mass tort claims relating
to silica and silica-containing products, and the outcome of ongoing disputes as to coverage in
relation to these claims; a further increase of claims and claims payment that may exhaust
underlying umbrella and excess coverage at accelerated rates; and future developments pertaining to
the Companys ability to recover reinsurance for asbestos and environmental pollution claims. CNA has regularly performed ground up reviews of all open APMT claims to evaluate the adequacy of
the Companys APMT reserves. In performing its comprehensive ground up analysis, the Company
considers input from its professionals with direct responsibility for the claims, inside and
outside counsel with responsibility for representation of the Company, and its actuarial staff.
These professionals review, among many factors, the policyholders present and predicted future
exposures, including such factors as claims volume, trial conditions, prior settlement history,
settlement demands and defense costs; the impact of asbestos defendant bankruptcies on the
policyholder; the policies issued by CNA, including such factors as aggregate or per occurrence
limits, whether the policy is primary, umbrella or excess, and the existence of policyholder
retentions and/or deductibles; the existence of other insurance; and reinsurance arrangements. With respect to other court cases and how they might affect the Companys reserves and reasonably
possible losses, the following should be noted. State and federal courts issue numerous decisions
each year, which potentially impact losses and reserves in both a favorable and unfavorable manner.
Examples of favorable developments include decisions to allocate defense and indemnity payments in
a manner so as to limit carriers obligations to damages taking place during the effective dates of
their policies; decisions holding that injuries occurring after asbestos operations are completed
are subject to the completed operations aggregate limits of the policies; and decisions ruling that
carriers loss control inspections of their insureds premises do not give rise to a duty to warn
third parties to the dangers of asbestos. 125




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##### Table of Contents



Examples of unfavorable developments include decisions limiting the application of the absolute
pollution exclusion; and decisions holding carriers liable for defense and indemnity of asbestos
and pollution claims on a joint and several basis. The Companys ultimate liability for its environmental pollution and mass tort claims is impacted
by several factors including ongoing disputes with policyholders over scope and meaning of coverage
terms and, in the area of environmental pollution, court decisions that continue to restrict the
scope and applicability of the absolute pollution exclusion contained in policies issued by the
Company after 1989. Due to the inherent uncertainties described above, including the inconsistency
of court decisions, the number of waste sites subject to cleanup, and in the area of environmental
pollution, the standards for cleanup and liability, the ultimate liability of CNA for environmental
pollution and mass tort claims may vary substantially from the amount currently recorded. Due to the inherent uncertainties in estimating claim and claim adjustment expense reserves for
APMT and due to the significant uncertainties previously described related to APMT claims, the
ultimate liability for these cases, both individually and in aggregate, may exceed the recorded
reserves. Any such potential additional liability, or any range of potential additional amounts,
cannot be reasonably estimated currently, but could be material to the Companys business, results
of operations, equity, and insurer financial strength and debt ratings. Due to, among other
things, the factors described above, it may be necessary for the Company to record material changes
in its APMT claim and claim adjustment expense reserves in the future, should new information
become available or other developments emerge. The following table provides data related to CNAs APMT claim and claim adjustment expense
reserves. APMT Reserves December 31, 2004
    
    December 31, 2003Environmental
    
    
    
    
    
    EnvironmentalPollution and
    
    
    
    
    
    Pollution and(In millions)
    
    Asbestos
    
    Mass Tort
    
    Asbestos
    
    Mass TortGross reserves
    
    $
    3,218
    
    
    $
    755
    
    
    $
    3,347
    
    
    $
    839Ceded reserves
    
    
    (1,532
    )
    
    
    (258
    )
    
    
    (1,580
    )
    
    
    (262
    )Net reserves
    
    $
    1,686
    
    
    $
    497
    
    
    $
    1,767
    
    
    $
    577
 Asbestos CNAs property and casualty insurance subsidiaries have exposure to asbestos-related claims.
Estimation of asbestos-related claim and claim adjustment expense reserves involves limitations
such as inconsistency of court decisions, specific policy provisions, allocation of liability among
insurers and insureds, and additional factors such as missing policies and proof of coverage.
Furthermore, estimation of asbestos-related claims is difficult due to, among other reasons, the
proliferation of bankruptcy proceedings and attendant uncertainties, the targeting of a broader
range of businesses and entities as defendants, the uncertainty as to which other insureds may be
targeted in the future and the uncertainties inherent in predicting the number of future claims. As of December 31, 2004 and 2003, CNA carried approximately $1,686 million and $1,767 million of
claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and
unreported asbestos-related claims. The Company recorded $54 million and $642 million of
unfavorable asbestos-related net claim and claim adjustment expense reserve development for the
years ended December 31, 2004 and 2003. The Company recorded no asbestos related net claim and
claim adjustment expense reserve development for the year ended December 31, 2002. The 2004
unfavorable net prior year development was primarily related to a loss from the commutation of
reinsurance treaties with Trenwick. The Company paid asbestos-related claims, net of reinsurance
recoveries, of $135 million, $121 million and $21 million for the years ended December 31, 2004,
2003 and 2002. 126




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##### Table of Contents



The Company recorded $1,826 million and $642 million in unfavorable gross and net
prior year development for the
year ended December 31, 2003 for reported and unreported asbestos-related claims, principally due to potential
losses from policies issued by the Company with high attachment points, which previous exposure analysis
indicated would not be reached. The Company examined the claims filing trends to determine timeframes within
which high excess policies issued by the Company could be reached. Elevated claims volumes and increased claims
values, together with certain adverse court decisions affecting the ability of policyholders to access excess policies,
supported the conclusion that excess policies with high attachment points previously thought not to be exposed may
now potentially be exposed. The ceded reinsurance arrangements on these excess policies are different from the
primary policies. In general, more extensive reinsurance arrangements apply to the excess policies. As a result, the prior year development
shows a higher ratio of ceded to gross amounts than the reserves established in prior periods, resulting in a higher
percentage of reserves ceded as of December 31, 2003 versus prior periods. Some asbestos-related defendants have asserted that their insurance policies are not subject to
aggregate limits on coverage. CNA has such claims from a number of insureds. Some of these claims
involve insureds facing exhaustion of products liability aggregate limits in their policies, who
have asserted that their asbestos-related claims fall within so-called non-products liability
coverage contained within their policies rather than products liability coverage, and that the
claimed non-products coverage is not subject to any aggregate limit. It is difficult to predict
the ultimate size of any of the claims for coverage purportedly not subject to aggregate limits or
predict to what extent, if any, the attempts to assert non-products claims outside the products
liability aggregate will succeed. The Companys policies also contain other limits applicable to
these claims, and the Company has additional coverage defenses to certain claims. The Company has
attempted to manage its asbestos exposure by aggressively seeking to settle claims on acceptable
terms. There can be no assurance that any of these settlement efforts will be successful, or that
any such claims can be settled on terms acceptable to CNA. Where CNA cannot settle a claim on
acceptable terms, the Company aggressively litigates the claim. A recent court ruling by the
United States Court of Appeals for the Fourth Circuit has supported certain of the Companys
positions with respect to coverage for non-products claims. However, adverse developments with
respect to such matters could have a material adverse effect on CNAs results of operations and/or
equity. Certain asbestos litigation in which CNA is currently engaged is described below: The ultimate cost of reported claims, and in particular APMT claims, is subject to a great many
uncertainties, including future developments of various kinds that CNA does not control and that
are difficult or impossible to foresee accurately. With respect to the litigation identified below
in particular, numerous factual and legal issues remain unresolved. Rulings on those issues by the
courts are critical to the evaluation of the ultimate cost to the Company. The outcome of the
litigation cannot be predicted with any reliability. Accordingly, the extent of losses beyond any
amounts that may be accrued are not readily determinable at this time. On February 13, 2003, CNA
announced it had resolved asbestos related coverage litigation and claims involving A.P. Green
Industries, A.P. Green Services and Bigelow  Liptak Corporation. Under the agreement, CNA is
required to pay $74 million, net of reinsurance recoveries, over a ten year period commencing after
the final approval of a bankruptcy plan of reorganization. The settlement resolves CNAs
liabilities for all pending and future asbestos claims involving A.P. Green Industries, Bigelow 
Liptak Corporation and related subsidiaries, including alleged non-products
exposures. The settlement received initial bankruptcy court approval on August 18, 2003 and CNA
expects to procure confirmation of a bankruptcy plan containing an injunction to protect CNA from
any future claims. CNA is engaged in insurance coverage litigation, filed in 2003, with underlying plaintiffs who have
asbestos bodily injury claims against the former Robert A. Keasbey Company (Keasbey) in New York
state court (Continental Casualty Co. v. Employers Ins. of Wausau et al., No. 601037/03
(N.Y. County)). Keasbey, a currently dissolved corporation, was a seller and installer of
asbestos-containing insulation products in New York and New Jersey. Thousands of plaintiffs have
filed bodily injury claims against Keasbey; however, Keasbeys involvement at a number of work
sites is a highly contested issue. Therefore, the defense disputes the percentage of valid claims
against Keasbey. CNA issued Keasbey primary policies for 1970-1987 and excess policies for
1972-1978. CNA has paid an amount substantially equal to the policies aggregate limits for
products and completed operations claims. Claimants against Keasbey allege, among other things,
that CNA owes coverage under sections of the policies not subject to the aggregate limits, an
allegation CNA vigorously contests in the lawsuit. In the litigation, CNA and the claimants seek
declaratory relief as to the interpretation of various policy provisions. The court dismissed a
claim alleging bad faith and seeking unspecified damages on March 21, 2004; that ruling is now
being appealed. With respect to this litigation in particular, numerous factual and legal issues
remain to be resolved that are critical to the final result, the outcome of which cannot be
predicted with any reliability. These factors include, among others: (a) whether the Company has
any further responsibility to compensate claimants against Keasbey under its policies and, if so,
under which policies; (b) whether the Companys responsibilities extend to a particular claimants
entire claim or only to a limited percentage of the claim; (c) whether the Companys
responsibilities under its policies are limited by the occurrence limits or other provisions of the
policies; (d) whether certain exclusions in some of the policies apply to exclude certain claims;
(e) the extent to which claimants can establish exposures to asbestos materials as to which Keasbey
has any responsibility; (f) the legal theories which must be pursued by such claimants to establish
the liability of Keasbey and whether such theories can, in fact, be established; (g) the diseases
and damages claimed by such claimants; (h) and the extent that such liability would be shared with
other responsible parties. Accordingly, the extent of losses beyond any amounts that may be accrued
are not readily determinable at this time. 127




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CNA has insurance coverage disputes related to asbestos bodily injury claims against Burns & Roe
Enterprises, Inc. (Burns & Roe). Originally raised in litigation, now stayed, these disputes are
currently part of In re: Burns & Roe Enterprises, Inc., pending in the U.S. Bankruptcy
Court for the District of New Jersey, No. 00-41610. Burns & Roe provided engineering and related
services in connection with construction projects. At the time of its bankruptcy filing on
December 4, 2000, Burns & Roe faced approximately 11,000 claims alleging bodily injury resulting
from exposure to asbestos as a result of construction projects in which Burns & Roe was involved.
CNA allegedly provided primary liability coverage to Burns & Roe from 1956-1969 and 1971-1974,
along with certain project-specific policies from 1964-1970. The parties in the litigation are
seeking a declaration of the scope and extent of coverage, if any, afforded to Burns & Roe for its
asbestos liabilities. The litigation has been stayed since May 14, 2003 pending resolution of the
bankruptcy proceedings. With respect to the Burns & Roe litigation and the pending bankruptcy
proceeding, numerous unresolved factual and legal issues will impact the ultimate exposure to the
Company. With respect to this litigation, numerous factual and legal issues remain to be resolved
that are critical to the final result, the outcome of which cannot be predicted with any
reliability. These factors include, among others: (a) whether the Company has any further
responsibility to compensate claimants against Burns & Roe under its policies and, if so, under
which; (b) whether the Companys responsibilities under its policies extend to a particular
claimants entire claim or only to a limited percentage of the claim; (c) whether the Companys
responsibilities under its policies are limited by the occurrence limits or other provisions of the
policies; (d) whether certain exclusions, including professional liability exclusions, in some of
the Companys policies apply to exclude certain claims; (e) the extent to which claimants can
establish exposures to asbestos materials as to which Burns & Roe has any responsibility; (f) the
legal theories which must be pursued by such claimants to establish the liability of Burns & Roe
and whether such theories can, in fact, be established; (g) the diseases and damages claimed by
such claimants; (h) the extent that any liability of Burns & Roe would be shared with other
potentially responsible parties; (i) and the impact of bankruptcy proceedings on claims and
coverage issue resolution. Accordingly, the extent of losses beyond any amounts that may be accrued
are not readily determinable at this time. CIC issued certain primary and excess policies to
Bendix Corporation (Bendix), now part of Honeywell International, Inc. (Honeywell). Honeywell
faces approximately 75,403 pending asbestos bodily injury claims resulting from alleged exposure to
Bendix friction products. CICs primary policies allegedly covered the period from at least 1939
(when Bendix began to use asbestos in its friction products) to 1983, although the parties disagree
about whether CICs policies provided product liability coverage before 1940 and from 1945 to 1956.
CIC asserts that it owes no further material obligations to Bendix under any primary policy.
Honeywell alleges that two primary policies issued by
CIC covering 1969-1975 contain occurrence limits but not product liability aggregate limits for
asbestos bodily injury claims. CIC has asserted, among other things, even if Honeywells
allegation is correct, which CNA denies, its liability is limited to a single occurrence limit per
policy or per year, and in the alternative, a proper allocation of losses would substantially limit
its exposure under the 1969-1975 policies to asbestos claims. These and other issues are being
litigated in Continental Insurance Co., et al. v. Honeywell International Inc., No.
MRS-L-1523-00 (Morris County, New Jersey) which was filed on May 15, 2000. In the litigation, the
parties are seeking declaratory relief of the scope and extent of coverage, if any, afforded to
Bendix under the policies issued by the Company. With respect to this litigation, numerous factual
and legal issues remain to be resolved that are critical to the final result, the outcome of which
cannot be predicted with any reliability. These factors include, among others: (a) whether certain
of the primary policies issued by the Company contain aggregate limits of liability; (b) whether
the Companys responsibilities under its policies extend to a particular claimants entire claim or
only to a limited percentage of the claim; (c) whether the Companys responsibilities under its
policies are limited by the occurrence limits or other provisions of the policies; (d) whether some
of the claims against Bendix arise out of events which took place after expiration of the Companys
policies; (e) the extent to which claimants can establish exposures to asbestos materials as to
which Bendix has any responsibility; (f) the legal theories which must be pursued by such claimants
to establish the liability of Bendix and whether such theories can, in fact, be established; (g)
the diseases and damages claimed by such claimants; (h) the extent that any liability of Bendix
would be shared with other responsible parties; and (i) whether Bendix is responsible for
reimbursement of funds advanced by the Company for defense and indemnity in the past. Accordingly,
the extent of losses beyond any amounts that may be accrued are not readily determinable at this
time. Suits have also been initiated directly against CNA and other insurers in four
jurisdictions: Ohio, Texas, West Virginia and Montana. In the two Ohio actions, plaintiffs allege the defendants negligently performed duties undertaken
to protect workers and the public from the effects of asbestos (Varner v. Ford Motor Co., et
al. (Cuyahoga County, Ohio, filed on June 12, 2003) and Peplowski v. ACE American Ins. Co.,
et al. (U.S. D. C. N.D. Ohio, filed on April 1, 2004)). The state trial court granted
insurers, including CNA, summary judgment against a representative group of plaintiffs, ruling 128




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that
insurers had no duty to warn plaintiffs about the dangers of asbestos. The summary judgment ruling
is on appeal. With respect to this litigation in particular, numerous factual and legal issues
remain to be resolved that are critical to the final result, the outcome of which cannot be
predicted with any reliability. These factors include: (a) the speculative nature and unclear
scope of any alleged duties owed to individuals exposed to asbestos and the resulting uncertainty
as to the potential pool of potential claimants; (b) the fact that imposing such duties on all
insurer and non-insurer corporate defendants would be unprecedented and, therefore, the legal
boundaries of recovery are difficult to estimate; (c) the fact that many of the claims brought to
date are barred by various Statutes of Limitation and it is unclear whether future claims would
also be barred; (d) the unclear nature of the required nexus between the acts of the defendants and
the right of any particular claimant to recovery; (e) the existence of hundreds of co-defendants in
some of the suits and the applicability of the legal theories pled by the claimants to thousands of
potential defendants. Accordingly, the extent of losses beyond any amounts that may be accrued are
not readily determinable at this time. Similar lawsuits have also been filed in Texas against CNA beginning in 2002, and other insurers and
non-insurer corporate defendants asserting liability for failing to warn of the dangers of asbestos
(Boson v. Union Carbide Corp., et al. (District Court of Nueces County, Texas)). During
2003, many of the Texas claims have been dismissed as time-barred by the applicable Statute of
Limitations. In other claims, the Texas courts have ruled that the carriers did not owe any duty
to the plaintiffs or the general public to advise on the effects of asbestos thereby dismissing
these claims. Certain of the Texas courts rulings have been appealed. With respect to this
litigation in particular, numerous factual and legal issues remain to be resolved that are critical
to the final result, the outcome of which cannot be predicted with any reliability. These factors
include: (a) the speculative nature and unclear scope of any alleged duties owed to individuals
exposed to asbestos and the resulting uncertainty as to the potential pool of potential claimants;
(b) the fact that imposing such duties on all insurer and non-insurer corporate defendants would
be unprecedented and, therefore, the legal boundaries of recovery are difficult to estimate; (c)
the fact that many of the claims brought to date are barred by various Statutes of Limitation and
it is unclear whether future claims would also be barred; (d) the unclear nature of the required
nexus between the acts of the defendants and the right of any particular claimant to recovery; (e)
the existence of hundreds of co-defendants in some of the suits and the applicability of the legal
theories pled by the claimants to thousands of potential defendants. Accordingly, the extent of
losses beyond any amounts that may be accrued are not readily determinable at this time. CNA was named in Adams v. Aetna, Inc., et al. (Circuit Court of Kanawha County, West
Virginia, filed June 23, 2002), a purported class action against CNA and other insurers, alleging
that the defendants violated West Virginias Unfair Trade Practices Act in handling and resolving
asbestos claims against their policyholders. The Adams litigation had been stayed pending disposition of two cases in the West Virginia Supreme Court of
Appeals. Those cases were decided in June, 2004. The Adams case also involves proceedings and
mediation in the Bankruptcy Court in New York with jurisdiction over the Manville Bankruptcy. In
those proceedings issues have been raised concerning the preclusive effect of the Manville
Bankruptcy settlements with insurers and resulting injunctions against claims. Those issues are
now on appeal to the United States District Court for the Eastern District of New York. With
respect to this litigation in particular, numerous factual and legal issues remain to be resolved
that are critical to the final result, the outcome of which cannot be predicted with any
reliability. These factors include: (a) the legal sufficiency of the novel statutory and common
law claims pled by the claimants; (b) the applicability of claimants legal theories to insurers
who neither defended nor controlled the defense of certain policyholders; (c) the possibility that
certain of the claims are barred by various Statutes of Limitation; (d) the fact that the
imposition of duties would interfere with the attorney client privilege and the contractual rights
and responsibilities of the parties to the Companys insurance policies; (e) the potential and
relative magnitude of liabilities of co-defendants. Accordingly, the extent of losses beyond any
amounts that may be accrued are not readily determinable at this time. On March 22, 2002, a direct action was filed in Montana (Pennock, et al. v. Maryland Casualty, et
al. First Judicial District Court of Lewis & Clark County, Montana) by eight individual filed plaintiffs (all employees of W.R. Grace & Co. (W.R. Grace)) and their spouses against CNA, Maryland
Casualty and the State of Montana. This action alleges that the carriers failed to warn of or
otherwise protect W.R. Grace employees from the dangers of asbestos at a W.R. Grace vermiculite
mining facility in Libby, Montana. The Montana direct action is currently stayed because of W.R.
Graces pending bankruptcy. With respect to this litigation in particular, numerous factual and
legal issues remain to be resolved that are critical to the final result, the outcome of which
cannot be predicted with any reliability. These factors include: (a) the unclear nature and scope
of any alleged duties owed to people exposed to asbestos and the resulting uncertainty as to the
potential pool of potential claimants; (b) the potential application of 129




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Statutes of Limitation to
many of the claims which may be made depending on the nature and scope of the alleged duties; (c)
the unclear nature of the required nexus between the acts of the defendants and the right of any
particular claimant to recovery; (d) the diseases and damages claimed by such claimants; (e) and
the extent that such liability would be shared with other potentially responsible parties; and, (f)
the impact of bankruptcy proceedings on claims resolution. Accordingly, the extent of losses beyond
any amounts that may be accrued are not readily determinable at this time. CNA is vigorously defending these and other cases and believes that it has meritorious defenses to
the claims asserted. However, there are numerous factual and legal issues to be resolved in
connection with these claims, and it is extremely difficult to predict the outcome or ultimate
financial exposure represented by these matters. Adverse developments with respect to any of these
matters could have a material adverse effect on CNAs business, insurer financial strength and debt
ratings, and results of operations and/or equity. As a result of the uncertainties and complexities involved, reserves for asbestos claims cannot be
estimated with traditional actuarial techniques that rely on historical accident year loss
development factors. In establishing asbestos reserves, CNA evaluates the exposure presented by
each insured. As part of this evaluation, CNA considers the available insurance coverage; limits
and deductibles; the potential role of other insurance, particularly underlying coverage below any
CNA excess liability policies; and applicable coverage defenses, including asbestos exclusions.
Estimation of asbestos-related claim and claim adjustment expense reserves involves a high degree
of judgment on the part of management and consideration of many complex factors, including:
inconsistency of court decisions, jury attitudes and future court decisions; specific policy
provisions; allocation of liability among insurers and insureds; missing policies and proof of
coverage; the proliferation of bankruptcy proceedings and attendant uncertainties; novel theories
asserted by policyholders and their counsel; the targeting of a broader range of businesses and
entities as defendants; the uncertainty as to which other insureds may be targeted in the future
and the uncertainties inherent in predicting the number of future claims; volatility in claim
numbers and settlement demands; increases in the number of non-impaired claimants and the extent to
which they can be precluded from making claims; the efforts by insureds to obtain coverage not
subject to aggregate limits; the long latency period between asbestos exposure and disease
manifestation and the resulting potential for involvement of multiple policy periods for individual
claims; medical inflation trends; the mix of asbestos-related diseases presented and the ability
to recover reinsurance. Environmental Pollution and Mass Tort Environmental pollution cleanup is the subject of both federal and state regulation. By some
estimates, there are thousands of potential waste sites subject to cleanup. The insurance industry
is involved in extensive litigation regarding coverage issues. Judicial interpretations in many
cases have expanded the scope of coverage and liability beyond the original intent of the policies.
The Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund) and
comparable state statutes (mini-Superfunds) govern the cleanup and restoration of
toxic waste sites and formalize the concept of legal liability for cleanup and restoration by
Potentially Responsible Parties (PRPs). Superfund and the mini-Superfunds establish mechanisms
to pay for cleanup of waste sites if PRPs fail to do so and assign liability to PRPs. The extent
of liability to be allocated to a PRP is dependent upon a variety of factors. Further, the number
of waste sites subject to cleanup is unknown. To date, approximately 1,500 cleanup sites have been
identified by the Environmental Protection Agency (EPA) and included on its National Priorities
List (NPL). State authorities have designated many cleanup sites as well. 130




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Many policyholders have made claims against various CNA insurance subsidiaries for defense costs
and indemnification in connection with environmental pollution matters. The vast majority of these
claims relate to accident years 1989 and prior, which coincides with CNAs adoption of the
Simplified Commercial General Liability coverage form, which includes what is referred to in the
industry as an absolute pollution exclusion. CNA and the insurance industry are disputing coverage
for many such claims. Key coverage issues include whether cleanup costs are considered damages
under the policies, trigger of coverage, allocation of liability among triggered policies,
applicability of pollution exclusions and owned property exclusions, the potential for joint and
several liability and the definition of an occurrence. To date, courts have been inconsistent in
their rulings on these issues. A number of proposals to modify Superfund have been made by various parties. However, no
modifications were enacted by Congress during 2004 or 2003, and it is unclear what positions
Congress or the Administration will take and what legislation, if any, will result in the future.
If there is legislation, and in some circumstances even if there is no legislation, the federal
role in environmental cleanup may be significantly reduced in favor of state action. Substantial
changes in the federal statute or the activity of the EPA may cause states to reconsider their
environmental cleanup statutes and regulations. There can be no meaningful prediction of the
pattern of regulation that would result or the possible effect upon CNAs results of operations or
equity. As of December 31, 2004 and 2003, CNA carried approximately $497 million and $577 million of claim
and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported
environmental pollution and mass tort claims. There was $1 million and $153 million of unfavorable
environmental pollution and mass tort net claim and claim adjustment expense reserve development
recorded for the years ended December 31, 2004 and 2003. There was no environmental pollution and
mass tort net claim and claim adjustment expense reserve development recorded for the year ended
December 31, 2002. Additionally, the Company recorded $15 million of current accident year losses
related to mass tort in 2004. The Company paid environmental pollution-related claims and mass
tort-related claims, net of reinsurance recoveries, of $96 million, $93 million and $116 million
for the years ended December 31, 2004, 2003 and 2002. CNA has made resolution of large environmental pollution exposures a management priority. The
Company has resolved a number of its large environmental accounts by negotiating settlement
agreements. In its settlements, CNA sought to resolve those exposures and obtain the broadest
release language to avoid future claims from the same policyholders seeking coverage for sites or
claims that had not emerged at the time CNA settled with its policyholder. While the terms of each
settlement agreement vary, CNA sought to obtain broad environmental releases that include known and
unknown sites, claims and policies. The broad scope of the release provisions contained in those
settlement agreements should, in many cases, prevent future exposure from settled policyholders.
It remains uncertain, however, whether a court interpreting the language of the settlement
agreements will adhere to the intent of the parties and uphold the broad scope of language of the
agreements. In 2003, CNA observed a marked increase in silica claims frequency in Mississippi, where plaintiff
attorneys appear to have filed claims to avoid the effect of tort reform. In 2004, silica claims
frequency in Mississippi has moderated notably due to implementation of tort reform measures and
favorable court decisions. To date, the most significant silica exposures identified included a
relatively small number of accounts with significant numbers of new claims reported in 2003 and
that continued at a far lesser rate in 2004. Establishing claim and claim adjustment expense
reserves for silica claims is subject to uncertainties because of disputes concerning medical
causation with respect to certain diseases, including lung cancer, geographical concentration of
the lawsuits asserting the claims, and the large rise in the total number of claims without
underlying epidemiological developments suggesting an increase in disease rates or plaintiffs.
Moreover, judicial interpretations regarding application of various tort defenses, including
application of various theories of joint and several liabilities, impede the Companys ability to
estimate its ultimate liability for such claims. Net Prior Year Development 2004 Net Prior Year Development Unfavorable net prior year development of $125 million, including $241 million of unfavorable claim
and claim adjustment expense reserve development and $116 million of favorable premium development,
was recorded in 131




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2004. The development discussed below includes premium development due to its
direct relationship to claim and
claim adjustment expense reserve development. The development discussed below is the amount prior
to consideration of any related reinsurance allowance impacts. The following table summarizes the pretax 2004 net prior year development for the Standard Lines,
Specialty Lines and Corporate and Other Non-Core segments. 2004 Net Prior Year Development CorporateStandard
    
    Specialty
    
    and Other(In millions)
    
    Lines
    
    Lines
    
    Non-Core
    
    TotalPretax unfavorable net prior year claim and
allocated claim adjustment expense development
excluding the impact of corporate aggregate
reinsurance treaties:Property and casualty, excluding APMT
    
    $
    105
    
    
    $
    75
    
    
    $
    23
    
    
    $
    203APMT
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    55Total
    
    
    105
    
    
    
    75
    
    
    
    78
    
    
    
    258Ceded losses related to corporate aggregate
reinsurance treaties
    
    
    8
    
    
    
    (17
    )
    
    
    9
    
    
    
    Pretax unfavorable net prior year development
before impact of premium development
    
    
    113
    
    
    
    58
    
    
    
    87
    
    
    
    258Unfavorable (favorable) premium
development, excluding impact of corporate
aggregate reinsurance treaties
    
    
    (96
    )
    
    
    (33
    )
    
    
    12
    
    
    
    (117
    )Ceded premiums related to corporate
aggregate reinsurance treaties
    
    
    (1
    )
    
    
    5
    
    
    
    (3
    )
    
    
    1Pretax unfavorable (favorable) premium development
    
    
    (97
    )
    
    
    (28
    )
    
    
    9
    
    
    
    (116
    )Total 2004 unfavorable net prior year
development (pretax)
    
    $
    16
    
    
    $
    30
    
    
    $
    96
    
    
    $
    142
 Also included in the 2004 net
prior year development is Life and Group Non-Core and unallocated
loss adjustment expense reserve development. Standard Lines The gross and net carried claim and claim adjustment expense reserves were $14,302 million and
$9,303 million at December 31, 2004. The gross and net carried claim and claim adjustment expense
reserves for Standard Lines were $14,282 million and $8,967 million at December 31, 2003.
Unfavorable net prior year development of $16 million, including $113 million of unfavorable claim
and allocated claim adjustment expense reserve development and $97 million of favorable premium
development, was recorded in 2004 for Standard Lines. Approximately $190 million of unfavorable net prior year claim and allocated claim adjustment
expense development recorded during 2004 resulted from increased severity trends for workers
compensation on large account policies primarily in accident years 2002 and prior. Favorable
premium development on retrospectively rated large account policies of $50 million was recorded in
relation to this unfavorable net prior year claim and allocated claims adjustment expense
development. Approximately $60 million of unfavorable net prior year claim and allocated claim adjustment
expense development was recorded in involuntary pools in which the Companys participation is
mandatory and primarily based on premium writings. Approximately $15 million of this unfavorable
net prior year claim and allocated claim adjustment expense development was related to the
Companys share of the National Workers Compensation Reinsurance Pool (NWCRP). During 2004, the
NWCRP reached an agreement with a former pool member to settle their pool liabilities at an amount
less than their established share. The result of this settlement will be a higher allocation to
the remaining pool members, including the Company. The remainder of this unfavorable net prior
year 132




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claim and allocated claim adjustment expense development was primarily due to increased
severity trends for workers compensation exposures in older years. Approximately $60 million of unfavorable net prior year claim and allocated claim adjustment
expense development resulted from the change in estimates due to increased severity trends for
excess and surplus business driven by excess liability, liquor liability and coverages provided to
apartment and condominium complexes. Approximately
$105 million of favorable net prior year claim and allocated claim adjustment expense development
resulted from reserve studies of commercial auto liability policies and the liability portion of
package policies. The change was due to improvement in the severity and number of claims for this
business. Approximately $85 million of favorable net prior year claim and allocated claim
adjustment expense development was due to improvement in the severity and number of claims for
property coverages primarily in accident year 2003. Other favorable net prior year premium development of approximately $50 million resulted primarily
from higher audit and endorsement premiums on workers compensation policies. During 2004, the Company executed commutation agreements with several members of the Trenwick
Group. These commutations resulted in unfavorable claim and claim adjustment expense reserve
development which was more than offset by a release of a previously established allowance for
uncollectible reinsurance. Specialty Lines The gross and net carried claim and claim adjustment expense reserves were $4,860 million and
$3,233 million at December 31, 2004. The gross and net carried claim and claim adjustment expense
reserves for Specialty Lines were $4,200 million and $2,919 million at December 31, 2003.
Unfavorable net prior year development of $30 million, including $58 million of unfavorable net
claim and allocated claim adjustment expense reserve development and $28 million of favorable
premium development, was recorded in 2004 for Specialty Lines. The Company executed commutation
agreements with several members of the Trenwick Group during 2004. These commutations resulted in
unfavorable claim and claim adjustment expense reserve development which was more than offset by a
release of a previously established allowance for uncollectible reinsurance. Additionally,
unfavorable net prior year claim and allocated claim adjustment expense reserve development
resulted from the increased emergence of several large directors and officers (D&O) claims,
primarily in recent accident years. Corporate and Other Non-Core The gross and net carried claim and claim adjustment expense reserves were $8,678 million and
$3,176 million at December 31, 2004. The gross and net carried claim and claim adjustment expense
reserves for Corporate and Other Non-Core were $9,672 million and $3,737 million at December 31,
2003. Unfavorable net prior year development of $96 million, including $87 million of net
unfavorable claim and allocated claim adjustment expense reserve development and $9 million of
unfavorable premium development was recorded in 2004 for Corporate and Other Non-Core. In 2004, the Company executed commutation agreements with several members of the Trenwick Group.
These commutations resulted in unfavorable net prior claim and allocated claim adjustment expense
reserve development partially offset by a release of a previously established allowance for
uncollectible reinsurance. The remainder of the unfavorable net prior year claim and allocated
claim adjustment expense reserve development resulted from several other small commutations and
increases to net reserves due to reducing ceded losses, partially offset by a release of a previously
established allowance for uncollectible reinsurance. 2003 Net Prior Year Development Unfavorable net prior year development of $2,952 million, including $2,409 million of unfavorable
claim and claim adjustment expense reserve development and $543 million of unfavorable premium
development, was recorded in 133




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2003. The development discussed below includes premium development due
to its direct relationship to claim and claim adjustment expense reserved development. The
development discussed below is the amount prior to consideration of any related reinsurance
allowance impacts. The following table summarizes the pretax 2003 net prior year development for the Standard Lines,
Specialty Lines and Corporate and Other Non-Core segments. 2003 Net Prior Year Development CorporateStandard
    
    Specialty
    
    and Other(In millions)
    
    Lines
    
    Lines
    
    Non-Core
    
    TotalPretax unfavorable net prior year claim
and allocated claim adjustment expense
development excluding the impact of
corporate aggregate reinsurance treaties:Property and casualty, excluding APMT
    
    $
    1,424
    
    
    $
    313
    
    
    $
    355
    
    
    $
    2,092APMT
    
    
    
    
    
    
    
    
    
    
    795
    
    
    
    795Total
    
    
    1,424
    
    
    
    313
    
    
    
    1,150
    
    
    
    2,887Ceded losses related to corporate
aggregate reinsurance treaties
    
    
    (485
    )
    
    
    (56
    )
    
    
    (102
    )
    
    
    (643
    )Pretax unfavorable net prior year
development before impact of premium
development
    
    
    939
    
    
    
    257
    
    
    
    1,048
    
    
    
    2,244Unfavorable (favorable) premium
development, excluding impact of
corporate aggregate reinsurance
treaties
    
    
    211
    
    
    
    6
    
    
    
    (32
    )
    
    
    185Ceded premiums related to corporate
aggregate reinsurance treaties
    
    
    269
    
    
    
    31
    
    
    
    58
    
    
    
    358Pretax unfavorable premium development
    
    
    480
    
    
    
    37
    
    
    
    26
    
    
    
    543Total 2003 unfavorable net prior year
development (pretax)
    
    $
    1,419
    
    
    $
    294
    
    
    $
    1,074
    
    
    $
    2,787
 Also included in the 2003 net
prior year development is Life and Group Non-Core and unallocated
loss adjustment expense reserve development. Standard Lines Unfavorable net prior year development of $1,419 million, including $939 million of unfavorable
claim and allocated claim adjustment expense reserve development and $480 million of unfavorable
premium development, was recorded in 2003 for Standard Lines. Approximately $495 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development was recorded related to construction defect claims in 2003. Based on
analyses completed during 2003, it became apparent that the assumptions regarding the number of
claims, which were used to estimate the expected losses, were no longer appropriate. The analyses
indicated that the actual number of claims reported during 2003 was higher than expected primarily
in states other than California. States where this activity is most evident include Texas,
Arizona, Nevada, Washington and Colorado. The number of claims reported in states other than
California during the first six months of 2003 was almost 35% higher than the last six months of
2002. The number of claims reported during the last six months of 2002 increased by less than 10%
from the first six months of 2002. In California, claims resulting from additional insured
endorsements increased throughout 2003. Additional insured endorsements are regularly included on
policies provided to subcontractors. The additional insured endorsement names general contractors
and developers as additional insureds covered by the policy. Current California case law
(Presley Homes, Inc. v. American States Insurance Company,(June 11, 2001) 90 Cal App.
4th 571, 108 Cal. Rptr. 2d 686) specifies that an individual subcontractor with an
additional insured obligation has a duty to defend the additional insured in the entire action,
subject to contribution or recovery later. In addition, the additional insured is allowed to
choose one specific carrier to defend the entire action. These additional insured claims can
remain open 134




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for a longer period of time than other construction defect claims because the
additional insured defense obligation can continue until the entire case is resolved. The adverse
reserve development recorded related to construction defect claims was primarily related to
accident years 1999 and prior. Unfavorable net prior year development of approximately $595 million, including $518 million of
unfavorable claim and allocated claim adjustment expense reserve development and $77 million of
unfavorable premium development, was recorded for large account business including workers
compensation coverages in 2003. Many of the policies issued to these large accounts include
provisions tailored specifically to the individual accounts. Such provisions effectively result in
the insured being responsible for a portion of the loss. An example of such a provision is a
deductible arrangement where the insured reimburses the Company for all amounts less than a
specified dollar amount. These arrangements often limit the aggregate amount the insured is
required to reimburse the Company. Analyses indicated that the provisions that result in the
insured being responsible for a portion would have less of an
impact due to the larger size of claims as well as the increased number of claims. The unfavorable
net prior year development recorded was primarily related to accident years 2000 and prior. Approximately $98 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003, resulted from a program covering facilities that
provide services to developmentally disabled individuals. This net prior year development was due
to an increase in the size of known claims and increases in policyholder defense costs. With
regard to average claim size, updated data showed the average claim increasing at an annual rate of
approximately 20%. Prior data had shown average claim size to be level. Similar to the average
claim size, updated data showed the average policyholder defense cost increasing at an annual rate
of approximately 20%. Prior data had shown average policyholder defense cost to be level. The net
prior year development recorded was primarily for accident years 2001 and prior. Approximately $40 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003 was for excess workers compensation coverages due to
increasing severity. The increase in severity means that a higher percentage of the total loss
dollars will be the Companys responsibility since more claims will exceed the point at which the
Companys coverage begins. The net prior year development recorded was primarily for accident year
2000. Approximately $73 million of unfavorable development recorded in 2003 was the result of a
commutation of all ceded reinsurance treaties with Gerling Global Group of companies (Gerling),
related to accident years 1999 through 2001, including $41 million of unfavorable claim and
allocated claim adjustment expense development and $32 million of unfavorable premium development.
Unfavorable net prior year claim and allocated claim adjustment expense reserve development of
approximately $40 million recorded in 2003 was related to a program covering tow truck and
ambulance operators, primarily impacting the 2001 accident year. The Company had previously
expected that loss ratios for this business would be similar to its middle market commercial
automobile liability business. During 2002, the Company ceased writing business under this
program. Approximately $25 million of unfavorable net prior year premium development recorded in 2003 was
related to 2003 reevaluation of losses ceded to a reinsurance contract covering middle market
workers compensation exposures. The reevaluation of losses led to a new estimate of the number and
dollar amount of claims that would be ceded under the reinsurance contract. As a result of the
reevaluation of losses, the Company recorded approximately $36 million of unfavorable claim and
allocated claim adjustment expense reserve development, which was ceded under the contract. The
net prior year development was recorded for accident year 2000. Approximately $11 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded for the year ended December 31, 2003 was related to directors
and officers exposures in Global Lines. The unfavorable net prior year reserve development was
primarily due to securities class action cases related to certain known corporate malfeasance cases
and investment banking firms. This net prior year development recorded was primarily for accident
years 2000 through 2002. The following premium and claim and allocated claim adjustment expense development was recorded in
the third quarter of 2003 as a result of the elimination of deficiencies and redundancies in
reserve positions within the segment. Unfavorable net prior year development of approximately $210
million related to small and middle market workers compensation exposures and approximately $110
million related to E&S lines was recorded in 2003. Offsetting these increases was $210 million of
favorable net prior year development in the property line of business, 135




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including $79 million
related to the September 11, 2001 World Trade Center Disaster and related events (WTC event). Also, offsetting the unfavorable premium and claim and allocated claim adjustment expense
development was a $216 million underwriting benefit from cessions to corporate aggregate
reinsurance treaties recorded in 2003. The benefit is comprised of $485 million of ceded losses
and $269 million of ceded premiums for accident years 2000 and 2001. Specialty Lines Unfavorable net prior year development of $294 million, including $257 million of unfavorable net
claim and allocated claim adjustment expense reserve development and $37 million of unfavorable
premium development, was recorded in 2003 for Specialty Lines. Approximately $50 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003 was related to increased severity in excess coverages
provided to facilities providing health care services. The increase in reserves is based on
reviews of individual accounts where claims had been
expected to be less than the point at which the Companys coverage applies. The current claim
trends indicated that the layers of coverage provided by the Company would be impacted. The net
prior year development recorded was primarily for accident years 2001 and prior. Approximately $68 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003 was for surety coverages primarily related to workers
compensation bond exposure from accident years 1990 and prior and large losses for accident years
1999 and 2002. Approximately $21 million of unfavorable net prior year claim and allocated claim
adjustment expense reserve development was recorded in the surety line of business in 2003 as the
result of recent developments on one large claim. Approximately $75 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded in 2003 was related to directors and officers exposures in CNA
Pro. The unfavorable net prior year reserve development was primarily due to securities class
action cases related to certain known corporate malfeasance cases and investment banking firms.
This net prior year development recorded was primarily for accident years 2000 through 2002. Approximately $84 million of losses was recorded for during 2003 as the result of a commutation of
ceded reinsurance treaties with Gerling covering CNA Health Pro, relating to accident years 1999
through 2002. The following development was recorded in 2003 as a result of the elimination of deficiencies and
redundancies in reserve positions within the segment. An additional $50 million of unfavorable net
prior year claim and allocated claim adjustment expense reserve development was recorded related to
medical malpractice and long term care facilities. Partially offsetting this unfavorable net prior
year claim and allocated claim adjustment expense reserve development was a $25 million
underwriting benefit from cessions to corporate aggregate reinsurance treaties. The benefit was
comprised of $56 million of ceded losses and $31 million of ceded premiums for accident years 2000
and 2001. See Note H for further discussion of the Companys aggregate reinsurance treaties. Corporate and Other Non-Core Unfavorable net prior year development of $1,074 million, including $1,048 million of net
unfavorable claim and allocated claim adjustment expense reserve development and $26 million of
unfavorable premium development was recorded in 2003 for Corporate and Other Non-Core. This development was primarily driven by $795 million of unfavorable net prior year claim and
allocated claim adjustment expense reserve development related to APMT. In addition to APMT development, there was unfavorable net prior year development recorded in 2003
related to CNA Re of $149 million and $75 million related to voluntary pools. 136




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Unfavorable net prior year claim and allocated claim adjustment expense reserve development of
approximately $25 million was recorded in CNA Re primarily for directors and officers exposures.
The unfavorable net prior year development was a result of a claims review that was completed
during the second quarter of 2003. The unfavorable net prior year development was primarily due to
securities class action cases related to certain known corporate malfeasance cases and investment
banking firms. The unfavorable net prior year development recorded was for accident years 2000 and
2001. The CNA Re unfavorable net prior year development for 2003 was also due to a general change in the
pattern of how losses emerged over time as reported by the companies that purchased reinsurance
from CNA Re. Losses have continued to show large increases for accident years in the late 1990s
and into 2000 and 2001. These increases are greater than the increases indicated by patterns from
older accident years and had a similar effect on several lines of business. Approximately $67
million unfavorable net prior year development recorded in 2003 was related to proportional
liability exposures, primarily from multi-line and umbrella treaties in accident years 1997 through
2001. Approximately $32 million of unfavorable net prior year development recorded in 2003 was
related to assumed financial reinsurance for accident years 2001 and prior and approximately $24
million of unfavorable net prior year development was related to professional liability exposures
in accident years 2001 and prior. Additionally, CNA Re recorded $15 million of unfavorable net prior year development for
construction defect related exposures. Because of the unique nature of this exposure, losses have
not followed expected development patterns. The continued reporting of claims in California, the
increase in the number of claims from states other than California and a review of individual
ceding companies exposure to this type of claim resulted in an increase in the estimated reserve. The following premium and claim and allocated claim adjustment expense development, was recorded in
2003 as a result of the elimination of deficiencies and redundancies in the reserve positions of
individual products within CNA Re. Unfavorable net prior year premium and claim and allocated
claim adjustment expense development of approximately $42 million related to Surety exposures, $32 million related to excess of loss
liability exposures and $12 million related to facultative liability exposures were recorded in the
third quarter of 2003. Offsetting this unfavorable net prior year development was approximately $55 million of favorable
net prior year development related to the WTC event as well as a $45 million underwriting benefit
from cessions to corporate aggregate reinsurance treaties recorded in 2003. The benefit from
cessions to the corporate aggregate reinsurance treaties was comprised of $102 million of ceded
losses and $57 million of ceded premiums for accident years 2000 and 2001. Unfavorable net prior year claim and allocated claim adjustment expense reserve development of
approximately $75 million was recorded during the third quarter of 2003 related to an adverse
arbitration decision involving a single large property and business interruption loss on a
voluntary insurance pool. The decision was rendered against a voluntary insurance pool in which
the Company was a participant. The loss was caused by a fire which occurred in 1995. The Company
no longer participates in this pool. 2002 Net Prior Year Development Unfavorable net prior year development of $126 million, including $35 million of unfavorable claim
and claim adjustment expense reserve development and $91 million of unfavorable premium
development, was recorded in 2002. The development discussed below includes premium development
due to its direct relationship to claim and claim adjustment expense reserve development. The
development discussed below is the amount prior to consideration of any related reinsurance
allowance impacts. 137




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The following table summarizes the pretax 2002 net prior year development for the Standard Lines,
Specialty Lines and Corporate and Other Non-Core segments. 2002 Net Prior Year Development CorporateStandard
    
    Specialty
    
    and Other(In millions)
    
    Lines
    
    Lines
    
    Non-Core
    
    TotalPretax unfavorable (favorable) net prior year
claim and allocated claim adjustment expense
development excluding the impact of corporate
aggregate reinsurance treaties:Property and casualty, excluding APMT
    
    $
    (191
    )
    
    $
    55
    
    
    $
    248
    
    
    $
    112APMT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    (191
    )
    
    
    55
    
    
    
    248
    
    
    
    112Ceded losses related to corporate aggregate
reinsurance treaties
    
    
    (14
    )
    
    
    (41
    )
    
    
    (93
    )
    
    
    (148
    )Pretax unfavorable (favorable) net prior year
development before impact of premium development
    
    
    (205
    )
    
    
    14
    
    
    
    155
    
    
    
    (36
    )Unfavorable (favorable) premium
development, excluding impact of corporate
aggregate reinsurance treaties
    
    
    76
    
    
    
    17
    
    
    
    (103
    )
    
    
    (10
    )Ceded premiums related to corporate
aggregate reinsurance treaties
    
    
    10
    
    
    
    29
    
    
    
    62
    
    
    
    101Pretax unfavorable (favorable) premium development
    
    
    86
    
    
    
    46
    
    
    
    (41
    )
    
    
    91Total 2002 unfavorable (favorable) net prior
year development (pretax)
    
    $
    (119
    )
    
    $
    60
    
    
    $
    114
    
    
    $
    55
 Also included in the 2002 net
prior year development is Life and Group Non-Core and unallocated
loss adjustment expense reserve development. Standard Lines Favorable net prior year development of $119 million, including $205 million of favorable claim and
allocated claim adjustment expense reserve development and $86 million of unfavorable premium
development, was recorded in
2002 for Standard Lines. Approximately $140 million of favorable net prior year development was
attributable to participation in the Workers Compensation Reinsurance Bureau (WCRB), a reinsurance
pool, and residual markets. The favorable net prior year development for WCRB was the result of
information received from the WCRB that reported the results of a recent actuarial review. This
information indicated that the Companys net required reserves for accident years 1970 through 1996
were $60 million less than the carried reserves. In addition, during 2002, the Company commuted
accident years 1965 through 1969 for a payment of approximately $5 million to cover carried
reserves of approximately $13 million, resulting in further favorable net prior year development of
$8 million. The favorable residual market net prior year development was the result of lower than
expected paid loss activity during recent periods for accident years dating back to 1984. The paid
losses during 2002 on prior accident years were approximately 60% of the previously expected
amount. In addition, Standard Lines had favorable net prior year development, primarily in the package
liability and auto liability lines of business due to new claims initiatives. These new claims
initiatives, which included specialized training on specific areas of the claims adjudication
process, enhanced claims litigation management, enhanced adjuster-level metrics to monitor
performance and more focused metric-based claim file review and oversight, are expected to produce
significant reductions in ultimate claim costs. Based on managements best estimate of the
reduction in ultimate claim costs, approximately $100 million of favorable prior year reserve
development was recorded in 2002. Approximately one-half of this favorable net prior year
development was recorded in accident years prior to 1999, with the remainder of the favorable net
prior year development recorded in accident years 1999 to 2001. 138




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Approximately $50 million of favorable net prior year development during 2002 was recorded in
commercial automobile liability. Most of the favorable net prior year development was from
accident year 2000. An actuarial review completed during 2002 showed that underwriting actions had
resulted in reducing the number of commercial automobile liability claims for recent accident
years, especially the number of large losses. Approximately $45 million of favorable net prior year development was recorded in property lines
during 2002. The favorable net prior year development was principally from accident years 1999
through 2001, and was the result of the low number of large losses in recent years. Although
property claims are generally reported relatively quickly, determining the ultimate cost of the
claim can involve a significant amount of time between the occurrence of the claim and settlement. Offsetting these favorable net prior year reserve development was approximately $100 million of
unfavorable premium development in middle market workers compensation, approximately $70 million of
unfavorable net prior year development in programs written in CNA E&S, approximately $30 million of
unfavorable net prior year development on a contractors account package policy program and
approximately $20 million of unfavorable net prior year development on middle market general
liability coverages. The unfavorable net prior year development on workers compensation was
principally due to additional reinsurance premiums for accident years 1999 through 2001. A CNA E&S program, covering facilities that provide services to developmentally disabled
individuals, accounts for approximately $50 million of the unfavorable net prior year development.
The unfavorable net prior year development was due to an increase in the size of known claims and
increases in policyholder defense costs. These increases became apparent as the result of an
actuarial review completed during 2002, with most of the development recorded in accident years
1999 and 2000. The other program which contributed to the CNA E&S unfavorable net prior year
development covers tow truck and ambulance operators in the 2000 and 2001 accident years. This
program was started in 1999. The Company expected that loss ratios for this business would be
similar to its middle market commercial automobile liability business. Reviews completed during
the year resulted in estimated loss ratios on the tow truck and ambulance business that were 25
points higher than the middle market commercial automobile liability loss ratios. The marine business recorded unfavorable net prior year development of approximately $15 million
during 2002. The remaining unfavorable net prior year development for the Marine business was due
principally to unfavorable net prior year development on hull and liability coverages from accident
years 1999 and 2000 offset by favorable reserve development on cargo coverages recorded for
accident year 2001. Reviews completed during 2002 showed additional reported losses on individual
large accounts and other bluewater business that drove the unfavorable hull and liability reserve
development. The unfavorable net prior year development on contractors account package policies was the result
of an actuarial review completed during 2002. Since this program is no longer being written, the
Company expected that the change in reported losses would decrease each quarterly period. However, in then recent quarterly
periods, the change in reported losses was higher than prior quarters, resulting in the unfavorable
net prior year development. Specialty Lines Unfavorable net prior year development of $60 million, including $14 million of unfavorable claim
and allocated claim adjustment expense reserve development and $46 million of unfavorable premium
development, was recorded in 2002 for Specialty Lines. Unfavorable net prior year development of
approximately $180 million was recorded for CNA HealthPro in 2002 and was driven principally by
medical malpractice excess products provided to hospitals and physicians and coverages provided to
long term care facilities, principally national for-profit nursing homes. Approximately $100
million of the unfavorable net prior year development was related to assumed excess products and
loss portfolio transfers, and was primarily driven by unexpected increases in the number of excess
claims in accident years 1999 and 2000. The percentage of total claims greater than $1 million has
increased by 33%, from less than 3% of all claims to more than 4% of all claims. CNA HealthPro no
longer writes assumed excess products and loss portfolio transfers. 139




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Approximately $50 million of the unfavorable net prior year unfavorable development was related to
long term care facilities. The unfavorable net prior year development principally impacted
accident years 1997 through 2000. The average value of claims closed during the first several
months of 2002 increased by more than 50% when compared to claims closed during 2001. In response
to those trends, CNA HealthPro has reduced its writings of national for-profit nursing home chains.
Excess products provided to healthcare institutions and physician coverages in a limited number of
states was responsible for the remaining development in CNA HealthPro. The unfavorable net prior
year development on excess products provided to institutions for accident years 1996 through 1999
resulted from increases in the size of claims experienced by these institutions. Due to the
increase in the size of claims, more claims were exceeding the point at which these excess products
apply. The unfavorable net prior year development on physician coverages was recorded for accident
years 1999 through 2001 in Oregon, California, Arizona and Nevada. The average claim size in these
states has increased by 20%, driving the change in losses. Offsetting this unfavorable net prior year development was favorable net prior year development in
CNA Pro and for Enron-related exposures. Programs providing professional liability coverage to
accountants, lawyers and realtors primarily drove favorable net prior year development of
approximately $110 million in CNA Pro. Reviews of this business completed during 2002 indicated
little activity for older accident years (principally prior to 1999), which reduced the need for
reserves on these years. The reported losses on these programs for accident years prior to 1999
increased by approximately $5 million during 2002. This increase compared to the total reserve at
the beginning of 2002 of approximately $180 million, net of reinsurance. Additionally, favorable
net prior year development of $20 million was associated with a settlement with Enron. The Company
had established a $20 million reserve for accident year 2001 for an excess layer associated with
Enron related surety losses; however the case was settled for less than the attachment point of
this excess layer. A $12 million underwriting benefit was recorded for the corporate aggregate reinsurance treaties in
2002, comprised of $41 million of ceded losses and $29 million of ceded premiums for accident year
2001. Corporate and Other Non-Core Unfavorable net prior year development of $114 million, including $155 million of unfavorable claim
and allocated claim adjustment expense reserve development and $41 million of favorable premium
development, was recorded in 2002 for Corporate and Other Non-Core. The development recorded in
2002 consisted primarily of CNA Re development. The unfavorable net prior year development recorded in 2002 related primarily to CNA Re and was
the result of an actuarial review completed during 2002 and was primarily recorded in the directors
and officers, professional liability errors and omissions, and surety lines of business. Several
large losses, as well as continued increases in the overall average size of claims for these lines,
have resulted in higher than expected loss ratios. Additionally, during 2002, CNA Re revised its estimate of premiums and losses related to the WTC
event. In estimating CNA Res WTC event losses, the Company performed a treaty-by-treaty analysis
of exposure. The Companys original loss estimate was based on a number of assumptions including
the loss to the industry, the loss to individual lines of business and the market share of CNA Res
cedants. Information that became available in the first quarter of 2002 resulted in CNA Re
increasing its estimate of WTC event related premiums and losses on its
property facultative and property catastrophe business. The impact of increasing the estimate of
gross WTC event losses by $144 million was fully offset on a net of reinsurance basis (before the
impact of the CCC Cover) by higher reinstatement premiums and a reduction of return premiums.
Approximately $95 million of CNA Res net WTC loss estimate was attributable to CNA Re U.K., which
was sold in 2002. A $32 million underwriting benefit was recorded for CNA Re for the corporate aggregate reinsurance
treaties in 2002. The benefit was comprised of $93 million of ceded losses and $62 million of
ceded premiums for accident year 2001. Concerns about reinsurance security, prompted in part by rating agency downgrades of several
reinsurers financial strength ratings, have impacted the reinsurance marketplace. Many ceding
companies have sought provisions for 140




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the collateralization of assumed reserves in the event of a
financial strength ratings downgrade or other triggers. Before exiting the reinsurance market, CNA
Re had been impacted by this trend and had entered into several contracts with rating or other
triggers. Additionally, personal insurance unfavorable net prior year development of $35 million
was recorded in 2002 on accident years 1997 through 1999. The unfavorable net prior year
development was principally due to the then continuing policyholder defense costs associated with
remaining open personal insurance claims. The unfavorable net prior year development was partially
offset by favorable reserve development on other run-off business driven principally by financial
and mortgage guarantee coverages from accident years 1997 and prior. The favorable net prior year
development on financial and mortgage guarantee coverages resulted from a review of the underlying
exposures and the outstanding losses, which showed that salvage and subrogation continues to be
collected on these types of claims, thereby reducing estimated future losses net of anticipated
reinsurance recoveries. Note G. Legal Proceedings and Related Contingent Liabilities IGI Contingency In 1997, CNA Reinsurance Company Limited (CNA Re Ltd.) entered into an arrangement with IOA Global,
Ltd. (IOA), an independent managing general agent based in Philadelphia, Pennsylvania, to develop
and manage a book of accident and health coverages. Pursuant to this arrangement, IGI Underwriting
Agencies, Ltd. (IGI), a personal accident reinsurance managing general underwriter, was appointed
to underwrite and market the book under the supervision of IOA. Between April 1, 1997 and December
1, 1999, IGI underwrote a number of reinsurance arrangements with respect to personal accident
insurance worldwide (the IGI Program). Under various arrangements, CNA Re Ltd. both assumed risks
as a reinsurer and also ceded a substantial portion of those risks to other companies, including
other CNA insurance subsidiaries and ultimately to a group of reinsurers participating in a
reinsurance pool known as the Associated Accident and Health Reinsurance Underwriters (AAHRU)
Facility. CNAs Group Operations business unit participated as a pool member in the AAHRU Facility
in varying percentages between 1997 and 1999. A portion of the premiums assumed under the IGI Program related to United States workers compensation carve-out business.
Some of these premiums were received from John Hancock Mutual Life Insurance Company (John Hancock) under four excess of
loss reinsurance treaties (the Treaties) issued by CNA Re Ltd. While John Hancock has indicated that it is not able to accurately
quantify its potential exposure to its cedents on business which is retroceded to CNA, John Hancock has reported $172 million of paid
and unpaid losses, under these Treaties. John Hancock is disputing portions of its assumed obligations resulting
in these reported losses, and has advised CNA that it is, or has been, involved in multiple arbitrations with its own
cedents, in which proceedings John Hancock is seeking to avoid and/or reduce risks that would otherwise arguably be ceded to CNA
through the Treaties. John Hancock has further informed CNA that it has settled several of these disputes, but has not provided CNA
with details of the settlements. To the extent that John Hancock is successful in reducing its liabilities in these disputes, that
development may have an impact on the recoveries it is seeking under the Treaties from CNA. As indicated, CNA arranged substantial reinsurance protection to manage its exposures under the IGI Program, including the United
States workers compensation carve-out business ceded from John Hancock and other reinsurers. While certain reinsurers of CNA, including participants in the AAHRU Facility, disputed their liabilities under the reinsurance contracts with respect to the IGI Program, those disputes
have been resolved and substantial reinsurance coverage exists for those exposures. In addition, CNA has instituted arbitration proceedings against John Hancock in which CNA is
seeking rescission of the Treaties as well as access to and the right to inspect the books and
records relating to the Treaties. Based on information known at this time, CNA believes it has
strong grounds to successfully challenge its alleged exposure derived from John Hancock through the ongoing
arbitration proceedings. CNA has also undertaken legal action seeking to avoid portions of the remaining exposure arising out of the IGI Program. 141




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CNA has established reserves for its estimated exposure
under the IGI Program, other than that derived from John Hancock,
and an estimate for recoverables from retrocessionaires. CNA has not
established any reserve for any exposure derived from John Hancock because, as indicated, CNA
believes the contract will be rescinded. Although the results of the Companys various loss
mitigation strategies with respect to the entire IGI Program to date support the recorded reserves,
the estimate of ultimate losses is subject to considerable uncertainty due to the complexities
described above. As a result of these uncertainties, the results of operations in future periods
may be adversely affected by potentially significant reserve additions. However, the extent of
losses beyond any amounts that may be accrued are not readily determinable at this time. Management
does not believe that any such reserve additions would be material to the equity of the Company,
although results of operations may be adversely affected. The Companys position in relation to
the IGI Program was unaffected by the sale of CNA Re Ltd. in 2002. California Wage and Hour Litigation Ernestine Samora, et al. v. CCC, Case No. BC 242487, Superior Court of California, County
of Los Angeles, California and Brian Wenzel v. Galway Insurance Company, Superior Court of
California, County of Orange No. BC01CC08868 are purported class actions on behalf of present and
former CNA employees asserting they worked hours for which they should have been compensated at a
rate of one and one-half times their base hourly wage over a four-year period. Plaintiffs seek
overtime compensation, penalty wages, and other statutory penalties without specifying any
particular amounts. The Company has denied the material allegations of the amended complaint and
intends to vigorously contest the claims. Numerous unresolved factual and legal issues remain to be resolved that are critical to the final
result, the outcome of which cannot be predicted with any reliability. Accordingly, the extent of
losses beyond any amounts that may be accrued are not readily determinable at this time. However,
based on facts and circumstances presently known in the opinion of management, an unfavorable
outcome would not materially adversely affect the equity of the Company, although results of
operations may be adversely affected. Voluntary Market Premium Litigation CNA, along with dozens of other insurance companies, is currently a defendant in nine cases,
including eight purported class actions, brought by large policyholders. The complaints differ in
some respects, but generally allege that the defendants, as part of an industry-wide conspiracy,
included improper charges in their retrospectively rated and other loss-sensitive insurance
programs. Among the claims asserted are violations of state antitrust laws, breach of contract,
fraud and unjust enrichment. In one federal court case, Sandwich Chef of Texas, Inc. v.
Reliance National Indemnity Insurance Co., 202 F.R.D. 480 (S.D. Tex. 2001), revd, 319 F.3d 205
(5th Cir. 2003), cert. denied, 72 USLW 3235 (U.S. Oct 6, 2003), the United States Court of
Appeals for the Fifth Circuit reversed a decision by the District Court for the Southern District
of Texas certifying a multi-state class. The Company intends to vigorously contest these claims. Numerous unresolved factual and legal issues remain to be resolved that are critical to the final
result, the outcome of which cannot be predicted with any reliability. Accordingly, the extent of
losses beyond any amounts that may be accrued are not readily determinable at this time. However,
based on facts and circumstances presently known in the opinion of management an unfavorable
outcome will not materially affect the equity of the Company, although results of operations may be
adversely affected. APMT Reserves CNA is also a party to litigation and claims related to APMT cases arising in the ordinary course
of business. See Note F for further discussion. 142




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Other Litigation CNA is also a party to other litigation arising in the ordinary course of business. Based on the
facts and circumstances currently known, such other litigation will not, in the opinion of
management, materially affect the results of operations or equity of CNA. Note H. Reinsurance CNA assumes and cedes reinsurance to other insurers, reinsurers and members of various reinsurance
pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide
greater diversification of risk, minimize exposures on larger risks and to exit certain lines of
business. The ceding of insurance does not discharge the primary liability of the Company.
Therefore, a credit exposure exists with respect to property and casualty and life reinsurance
ceded to the extent that any reinsurer is unable to meet their obligations or to the extent that
the reinsurer disputes the liabilities assumed under reinsurance agreements. Property and casualty reinsurance coverages are tailored to the specific risk characteristics of
each product line and CNAs retained amount varies by type of coverage. Treaty reinsurance is
purchased to protect specific lines of business such as property, workers compensation, and
professional liability. Corporate catastrophe reinsurance is also purchased for property and
workers compensation exposure. Most treaty reinsurance is purchased on an excess of loss basis. CNA
also utilizes facultative reinsurance in certain lines. The Companys overall reinsurance program includes certain property and casualty contracts, such as
the corporate aggregate reinsurance treaties discussed in more detail below, that are entered into
and accounted for on a funds withheld basis. Under the funds withheld basis, the Company records
the cash remitted to the reinsurer for the reinsurers margin, or cost of the reinsurance contract,
as ceded premiums. The remainder of the premiums ceded under the reinsurance contract not remitted
in cash is recorded as funds withheld liabilities. The Company is required to increase the funds
withheld balance at stated interest crediting rates applied to the funds withheld balance or as
otherwise specified under the terms of the contract. The funds withheld liability is reduced by
any cumulative claim payments made by the Company in excess of the Companys retention under the
reinsurance contract. If the funds withheld liability is exhausted, interest crediting will cease
and additional claim payments are recoverable from the reinsurer. The funds withheld liability is
recorded in reinsurance balances payable in the Consolidated Balance Sheets. Interest cost on funds withheld and other deposits is credited during all periods in which a funds
withheld liability exists. Pretax interest cost, which is included in net investment income, was
$267 million, $344 million and $239 million in 2004, 2003 and 2002. The amount subject to interest
crediting rates on such contracts was $2,570 million and $2,789 million at December 31, 2004 and
2003. Certain funds withheld reinsurance contracts, including the corporate aggregate reinsurance
treaties, require interest on additional premiums arising from ceded losses as if those premiums
were payable at the inception of the contract. Additionally, on the corporate aggregate
reinsurance treaties discussed below, if the Company exceeds certain aggregate loss ratio
thresholds, the rate on which interest charges are accrued would increase and be retroactively
applied to the inception of the contract or to a specified date. Any such retroactive interest is
accrued in the period the additional premiums arise or the loss ratio thresholds are met. The
amount of retroactive interest, included in the totals above, was $46 million, $147 million and $10
million in 2004, 2003 and 2002. The amount subject to interest crediting on these funds withheld contracts will vary over time
based on a number of factors, including the timing of loss payments and ultimate gross losses
incurred. The Company expects that it will continue to incur significant interest costs on these
contracts for several years. 143




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##### Table of Contents



The following table summarizes the amounts receivable from reinsurers at December 31, 2004 and
2003. Components of reinsurance receivables (In millions)
    
    December 31, 2004
    
    December 31, 2003Reinsurance receivables related to insurance reserves:Ceded claim and claim adjustment expense
    
    $
    13,984
    
    
    $
    14,216Ceded future policy benefits
    
    
    1,260
    
    
    
    1,218Ceded policyholders funds
    
    
    65
    
    
    
    7Billed reinsurance receivables
    
    
    685
    
    
    
    813Reinsurance receivables
    
    
    15,994
    
    
    
    16,254Allowance for uncollectible reinsurance
    
    
    (531
    )
    
    
    (573
    )Reinsurance receivables, net of allowance
for uncollectible reinsurance
    
    $
    15,463
    
    
    $
    15,681
 The Company has established an allowance for uncollectible reinsurance receivables. The
allowance for uncollectible reinsurance receivables was $531 million and $573 million at December
31, 2004 and 2003. The net decrease in the allowance was primarily due to a release of a
previously established allowance related to The Trenwick Group resulting from the execution of
commutation agreements, partially offset by a net increase in the allowance for other reinsurance
receivables. The provision for uncollectible reinsurance receivables is presented as a component
of Insurance claims and policyholders benefits on the Consolidated Statements of Operations. Prior to the April of 2004 sale of its individual life and annuity business to Swiss Re, CNA had
reinsured a portion of this business through coinsurance, yearly renewable term and facultative
programs to various reinsurers. As a result of the sale of the individual life and annuity
business, 100% of the net reserves were reinsured to Swiss Re. Subject to certain exceptions,
Swiss Re assumed the credit risk of the business that was previously reinsured to other carriers.
As of December 31, 2004, CNA ceded $1,012 million of future policy benefits to Swiss Re. In
connection with the sale of the group benefits business, CNA ceded insurance reserves to Hartford.
As of December 31, 2004 and 2003, these ceded reserves were $1,726 million and $1,473 million. The Company attempts to mitigate its credit risk related to reinsurance by entering into
reinsurance arrangements only with reinsurers that have credit ratings above certain levels and by
obtaining substantial amounts of collateral. The primary methods of obtaining collateral are
through reinsurance trusts, letters of credit and funds withheld balances. Such collateral was
approximately $4,561 million and $5,255 million at December 31, 2004 and 2003. In 2003, the Company commuted all remaining ceded and assumed reinsurance contracts with four
Gerling entities. The commutations resulted in a pretax loss of $109 million, which was net of a
previously established allowance for doubtful accounts of $47 million. The Company has no further
exposure to the Gerling companies that are in run-off. CNAs largest recoverables from a single reinsurer at December 31, 2004, including prepaid
reinsurance premiums, were approximately $2,236 million from subsidiaries of The Allstate
Corporation (Allstate), $2,163 million from subsidiaries of
Swiss Reinsurance Group, $1,843 million
from subsidiaries of Hannover Reinsurance (Ireland), Ltd., $1,726 million from Hartford Life Group
Insurance Company, $944 million from American Reinsurance Company, and $603 million from
subsidiaries of the Berkshire Hathaway Group. Insurance claims and policyholders benefits reported in the Consolidated Statements of Operations
are net of reinsurance recoveries of $5,789 million, $6,325 million and $4,164 million for 2004,
2003 and 2002. 144




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##### Table of Contents



The effects of reinsurance on earned premiums and written premiums for the years ended December 31,
2004, 2003 and 2002 are shown in the following tables. Components of Earned Premiums Assumed/(In millions)
    
    Direct
    
    Assumed
    
    Ceded
    
    Net
    
    Net %2004 Earned PremiumsProperty and casualty
    
    $
    10,739
    
    
    $
    199
    
    
    $
    3,634
    
    
    $
    7,304
    
    
    
    2.7
    %Accident and health
    
    
    1,228
    
    
    
    63
    
    
    
    507
    
    
    
    784
    
    
    
    8.0Life
    
    
    419
    
    
    
    
    
    
    
    298
    
    
    
    121
    
    
    
    Total earned premiums
    
    $
    12,386
    
    
    $
    262
    
    
    $
    4,439
    
    
    $
    8,209
    
    
    
    3.2
    %2003 Earned PremiumsProperty and casualty
    
    $
    10,661
    
    
    $
    726
    
    
    $
    4,452
    
    
    $
    6,935
    
    
    
    10.5
    %Accident and health
    
    
    1,602
    
    
    
    92
    
    
    
    59
    
    
    
    1,635
    
    
    
    5.6Life
    
    
    1,102
    
    
    
    7
    
    
    
    465
    
    
    
    644
    
    
    
    1.0Total earned premiums
    
    $
    13,365
    
    
    $
    825
    
    
    $
    4,976
    
    
    $
    9,214
    
    
    
    9.0
    %2002 Earned PremiumsProperty and casualty
    
    $
    9,694
    
    
    $
    946
    
    
    $
    3,812
    
    
    $
    6,828
    
    
    
    13.9
    %Accident and health
    
    
    2,612
    
    
    
    153
    
    
    
    15
    
    
    
    2,750
    
    
    
    5.6Life
    
    
    1,089
    
    
    
    (5
    )
    
    
    449
    
    
    
    635
    
    
    
    (0.7
    )Total earned premiums
    
    $
    13,395
    
    
    $
    1,094
    
    
    $
    4,276
    
    
    $
    10,213
    
    
    
    10.7
    %
 Included in the direct and ceded earned premiums for the years ended December 31, 2004, 2003
and 2002 are $3,293 million, $2,652 million and $2,305 million related to business that is 100%
reinsured as a result of business dispositions and a significant captive program. Components of Written Premiums Assumed/(In millions)
    
    Direct
    
    Assumed
    
    Ceded
    
    Net
    
    Net %2004 Written PremiumsProperty and casualty
    
    $
    10,289
    
    
    $
    48
    
    
    $
    3,376
    
    
    $
    6,961
    
    
    
    0.7
    %Accident and health
    
    
    1,241
    
    
    
    62
    
    
    
    508
    
    
    
    795
    
    
    
    7.8Life
    
    
    426
    
    
    
    
    
    
    
    305
    
    
    
    121
    
    
    
    Total written premiums
    
    $
    11,956
    
    
    $
    110
    
    
    $
    4,189
    
    
    $
    7,877
    
    
    
    1.4
    %2003 Written PremiumsProperty and casualty
    
    $
    10,880
    
    
    $
    649
    
    
    $
    4,450
    
    
    $
    7,079
    
    
    
    9.2
    %Accident and health
    
    
    1,601
    
    
    
    92
    
    
    
    59
    
    
    
    1,634
    
    
    
    5.6Life
    
    
    1,098
    
    
    
    6
    
    
    
    465
    
    
    
    639
    
    
    
    1.0Total written premiums
    
    $
    13,579
    
    
    $
    747
    
    
    $
    4,974
    
    
    $
    9,352
    
    
    
    8.0
    %2002 Written PremiumsProperty and casualty
    
    $
    9,978
    
    
    $
    953
    
    
    $
    3,936
    
    
    $
    6,995
    
    
    
    13.6
    %Accident and health
    
    
    2,618
    
    
    
    187
    
    
    
    13
    
    
    
    2,792
    
    
    
    6.7Life
    
    
    1,091
    
    
    
    (5
    )
    
    
    449
    
    
    
    637
    
    
    
    (0.7
    )Total written premiums
    
    $
    13,687
    
    
    $
    1,135
    
    
    $
    4,398
    
    
    $
    10,424
    
    
    
    10.9
    %
 145




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##### Table of Contents



The impact of reinsurance on life insurance inforce at December 31, 2004, 2003 and 2002 is
shown in the following table. Components of Life Insurance Inforce (In millions)
    
    Direct
    
    Assumed
    
    Ceded
    
    Net2004 (a)
    
    $
    56,610
    
    
    $
    35
    
    
    $
    54,486
    
    
    $
    2,1592003
    
    
    388,380
    
    
    
    588
    
    
    
    295,659
    
    
    
    93,3092002
    
    
    423,151
    
    
    
    14,600
    
    
    
    340,520
    
    
    
    97,231
  (a)
    The decline in gross inforce is attributable to the sales of the group benefits and the
individual life businesses. For 2002, the Company entered into a corporate aggregate reinsurance treaty covering
substantially all of the Companys property and casualty lines of business (the 2002 Cover). Ceded
premium related to the reinsurers margin of $10 million was recorded in 2002. No losses were
ceded under this contract, and the 2002 Cover was commuted as of December 31, 2002. The Company has an aggregate reinsurance treaty related to the 1999 through 2001 accident years
that covers substantially all of the Companys property and casualty lines of business (the
Aggregate Cover). The Aggregate Cover provides for two sections of coverage. These coverages
attach at defined loss ratios for each accident year. Coverage under the first section of the
Aggregate Cover, which is available for all accident years covered by the treaty, has a $500
million limit per accident year of ceded losses and an aggregate limit of $1 billion of ceded
losses for the three accident years. The ceded premiums associated with the first section are a
percentage of ceded losses and for each $500 million of limit the ceded premium is $230 million.
The second section of the Aggregate Cover, which only relates to accident year 2001, provides
additional coverage of up to $510 million of ceded losses for a maximum ceded premium of $310
million. Under the Aggregate Cover, interest charges on the funds withheld liability accrue at 8%
per annum. The aggregate loss ratio for the three-year period has exceeded certain thresholds
which requires additional premiums to be paid and an increase in the rate at which interest charges
are accrued. This rate will increase to 8.25% per annum commencing in 2006. Also, if an
additional aggregate loss ratio threshold is exceeded, additional premiums of 10% of amounts in
excess of the aggregate loss ratio threshold are to be paid retroactively with interest. In 2001, as a result of reserve additions including those related to accident year 1999, the
remaining $500 million limit related to the 1999 accident year under the first section was fully
utilized and losses of $510 million were ceded under the second section as a result of losses
related to the WTC event. During 2003, as a result of the unfavorable net prior year development
recorded related to accident years 2000 and 2001, the $500 million limit related to the 2000 and
2001 accident years under the first section was fully utilized and losses of $500 million were
ceded under the first section of the Aggregate Cover. The aggregate limits for the Aggregate Cover
have been fully utilized. The impact of the Aggregate Cover was as follows: Impact of Aggregate Cover Year ended December 31(In millions)
    
    2004
    
    2003
    
    2002Ceded earned premium
    
    $
    (1
    )
    
    $
    (258
    )
    
    $
    Ceded claim and claim adjustment expenses
    
    
    
    
    
    
    500
    
    
    
    Interest charges
    
    
    (82
    )
    
    
    (147
    )
    
    
    (51
    )Pretax benefit (expense)
    
    $
    (83
    )
    
    $
    95
    
    
    $
    (51
    )
 In 2001, the Company entered into a one-year aggregate reinsurance treaty related to the 2001
accident year covering substantially all property and casualty lines of business in the Continental
Casualty Company pool (the 146




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##### Table of Contents



CCC Cover). The loss protection provided by the CCC Cover has an
aggregate limit of approximately $761 million of ceded losses. The ceded premiums are a percentage
of ceded losses. The ceded premium related to full utilization of the $761 million of limit is
$456 million. The CCC Cover provides continuous coverage in excess of the second section of the
Aggregate Cover discussed above. Under the CCC Cover, interest charges on the funds withheld are
accrued at 8% per annum. The interest rate increases to 10% per annum if the aggregate loss ratio
exceeds certain thresholds. The aggregate loss ratio exceeded that threshold in 2004 which
required retroactive interest charges on funds withheld of $46 million. During 2003, as a result
of unfavorable development related to accident year 2001, the CCC Cover was fully utilized. At the Companys discretion, the contract can be commuted annually on the anniversary date of the
contract. The CCC Cover requires mandatory commutation on December 31, 2010, if the agreement has
not been commuted on or before such date. Upon mandatory commutation of the CCC
Cover, the reinsurer is required to release to the Company the
existing balance of the funds withheld account if the unpaid ultimate
ceded losses at the time of commutation are less than or equal to the
funds withheld account balance. If the unpaid ultimate ceded losses at
the time of commutation are greater than the funds withheld account balance, the reinsurer will
release the existing balance of the funds withheld account and pay CNA the present value of the
projected amount the reinsurer would have had to pay from its own funds absent a commutation. The
present value is calculated using 1-year LIBOR as of the date of the commutation. The impact of the CCC Cover was as follows: Impact of CCC Cover Year ended December 31(In millions)
    
    2004
    
    2003
    
    2002Ceded earned premium
    
    $
    
    
    
    $
    (100
    )
    
    $
    (101
    )Ceded claim and claim adjustment expenses
    
    
    
    
    
    
    143
    
    
    
    148Interest charges
    
    
    (91
    )
    
    
    (59
    )
    
    
    (37
    )Pretax (expense) benefit
    
    $
    (91
    )
    
    $
    (16
    )
    
    $
    10
 147




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##### Table of Contents



Note I. Debt Debt is composed of the following obligations. Debt December 31(In millions)
    
    2004
    
    2003Variable rate debt:Credit facility  CNA Surety, due September 30, 2005
    
    $
    25
    
    
    $
    30Term loan  CNA Surety, due through September 30, 2005
    
    
    10
    
    
    
    20Debenture  CNA Surety, face amount of $31, due April 29, 2034
    
    
    30
    
    
    
    Credit facility  CNAF, due April 30, 2004
    
    
    
    
    
    
    250Senior notes:6.500%, face amount of $493, due April 15, 2005
    
    
    493
    
    
    
    4926.750%, face amount of $250, due November 15, 2006
    
    
    249
    
    
    
    2496.450%, face amount of $150, due January 15, 2008
    
    
    149
    
    
    
    1496.600%, face amount of $200, due December 15, 2008
    
    
    199
    
    
    
    1998.375%, face amount of $70, due August 15, 2012
    
    
    69
    
    
    
    695.850%, face amount of $549, due December 15, 2014
    
    
    546
    
    
    
    6.950%, face amount of $150, due January 15, 2018
    
    
    149
    
    
    
    149Debenture, 7.250%, face amount of $243, due November 15, 2023
    
    
    241
    
    
    
    241Capital leases, 10.400%-11.500%, due through December 31, 2011
    
    
    
    
    
    
    33Other debt, 1.000%-11.500%, due through 2019
    
    
    47
    
    
    
    23Surplus notes:Encompass Insurance Company of America (EICA) surplus note,
face amount of $50, due March 31, 2006
    
    
    50
    
    
    
    Total debt
    
    $
    2,257
    
    
    $
    1,904Short term debt
    
    $
    531
    
    
    $
    263Long term debt
    
    
    1,726
    
    
    
    1,641Total debt
    
    $
    2,257
    
    
    $
    1,904
 In December of 2004, CNA acquired three buildings which previously were leased under capital
leases. As part of that transaction, CNA directly assumed the underlying debt obligation which the
lessor of the three buildings owed. In February of 2004, CCC issued $346 million in surplus notes related to the Life and Group sales.
CNA received insurance regulatory approval for the repayment of a $300 million CCC Life surplus
note, and repaid the note, including accrued interest, on June 16, 2004. CNA received insurance
regulatory approval for the repayment of the $46 million CCC Group surplus note and repaid the
note, including accrued interest, on December 15, 2004. On December 15, 2004 CNAF completed its sale of $549 million of 5.85% ten-year senior notes in a
public offering. During 2004, Encompass Insurance Company of America (EICA), a wholly owned
subsidiary of the Company, sold a $50 million surplus note to Allstate Insurance Company. The EICA
note bears interest semi-annually at 2.5% per annum and is due on March 31, 2006. CNA plans to
seek approval from the insurance regulatory authority for repayment of the surplus note at
maturity. In May of 2004, CNA Surety, a 64% owned and consolidated subsidiary of CNA, issued privately,
through a wholly-owned trust, $30 million of preferred securities through two pooled transactions.
These securities bear interest at a rate of LIBOR plus 337.5 basis points with a thirty-year term
and are redeemable after five years. The securities were issued by CNA Surety Capital Trust I
(Issuer Trust). The sole asset of the Issuer Trust consists of a $31 million junior subordinated
debenture issued by CNA Surety to the Issuer Trust. The subordinated debenture bears interest at a
rate of LIBOR plus 337.5 basis points and matures in April of 2034. As of December 31, 2004, the
interest rate on the junior subordinated debenture was 5.7%. 148




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##### Table of Contents



On September 30, 2003, CNA Surety entered into a $50 million credit agreement, which consisted of a
$30 million two-year revolving credit facility and a $20 million two-year term loan, with
semi-annual principal payments of $5 million. The credit agreement is an amendment to a $65
million credit agreement, extending the revolving loan termination date from September 30, 2003 to
September 30, 2005. The new revolving credit facility was fully utilized at inception. In June of
2004, CNA Surety reduced the outstanding borrowings under the credit facility by
$10 million, and in September of 2004, CNA Surety increased the outstanding borrowings under the
credit facility by $5 million to fund the semi-annual term loan payment. Under the amended credit facility agreement, CNA Surety pays a facility fee of 35.0 basis points on
the revolving credit portion of the facility, interest at LIBOR plus 90 basis points, and for
utilization greater than 50% of the amount available to borrow an additional fee of 5.0 basis
points. On the term loan, CNA Surety pays interest at LIBOR plus 62.5 basis points. At December
31, 2004, the weighted-average interest rate on the $35 million of outstanding borrowings under the
credit agreement, including facility fees and utilization fees, was 3.3%. Effective January 30,
2003, CNA Surety entered into a swap agreement on the term loan portion of the agreement which uses
the 3-month LIBOR to determine the swap increment. As a result, the effective interest rate on the
$10 million in outstanding borrowings on the term loan was 2.77% at December 31, 2004. On the $25
million revolving credit agreement, the effective interest rate at December 31, 2004 was 3.49%. The combined aggregate maturities for debt at December 31, 2004 are presented in the following
table. Maturity of Debt (In millions)2005
    
    $
    5312006
    
    
    3042007
    
    
    122008
    
    
    3542009
    
    
    5Thereafter
    
    
    1,061Less original issue discount
    
    
    (10
    )Total
    
    $
    2,257
 Note J. Benefit Plans Pension and Postretirement Healthcare and Life Insurance Benefit Plans CNAF and certain subsidiaries sponsor noncontributory pension plans typically covering full-time
employees age 21 or over who have completed at least one year of service. Effective January 1,
2000, the CNA Retirement Plan was closed to new participants; instead, retirement benefits are
provided to these employees under the Companys savings plans discussed below. While the terms of
the plans vary, benefits are generally based on years of credited service and the employees
highest 60 consecutive months of compensation. CNA uses December 31 as the measurement date for
the majority of its plans. CNAs funding policy is to make contributions in accordance with applicable governmental regulatory
requirements. The assets of the plans are invested primarily in U.S. government and
mortgage-backed securities with the balance in short term investments, equity securities and
limited partnerships. CNA provides certain healthcare and life insurance benefits to eligible retired employees, their
covered dependents and their beneficiaries. The funding for these plans is generally to pay
covered expenses as they are incurred. In September of 2004, the Company announced significant changes to the CNA Retiree Health and Group
Benefits plan affecting current and future retirees. Benefit changes were effective January 1,
2005 and include: elimination of dental plan subsidy, elimination of Medicare Part B premium
reimbursement, reduction of retiree life insurance to a maximum of $10,000 per retiree and
elimination of various medical plan options. The effects of these changes are 149




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##### Table of Contents



reflected in the 2004 actuarial valuation beginning October 1, 2004, resulting in a reduction to the accumulated
postretirement benefit obligation of $137 million at December 31, 2004 and a reduction in the net
periodic benefit cost of $5 million for the year ended December 31, 2004. In 2000 approximately 60% of CCCs eligible employees elected to forego earning additional benefits
in CNAs defined benefit pension plan. These employees maintain an accrued pension account
within the defined benefit pension plan that is credited with interest annually at the 30-year
treasury rate. Instead, employees who elected to discontinue accruing benefits in the defined
benefit pension plan receive certain enhanced employer contributions in the CNA Savings and Capital
Accumulation Plan (discussed below). Employees hired on or after January 1, 2000 are not eligible
to participate in CNAs defined benefit pension plan. The following table provides a reconciliation of benefit obligations. Benefit Obligations and Accrued Benefit Costs Pension Benefits
    
    Postretirement Benefits(In millions)
    
    2004
    
    2003
    
    2004
    
    2003Benefit obligation at January 1
    
    $
    2,403
    
    
    $
    2,243
    
    
    $
    345
    
    
    $
    385Changes in benefit obligation:Service cost
    
    
    31
    
    
    
    33
    
    
    
    4
    
    
    
    7Interest cost
    
    
    145
    
    
    
    146
    
    
    
    17
    
    
    
    22Participants contributions
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    8Plan amendments
    
    
    
    
    
    
    1
    
    
    
    (138
    )
    
    
    (30
    )Actuarial gain (loss)
    
    
    104
    
    
    
    150
    
    
    
    (26
    )
    
    
    (16
    )Curtailment/settlement
    
    
    2
    
    
    
    (25
    )
    
    
    
    
    
    
    Benefits paid
    
    
    (164
    )
    
    
    (151
    )
    
    
    (31
    )
    
    
    (31
    )Foreign currency translation
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    Benefit obligations at December 31
    
    
    2,527
    
    
    
    2,403
    
    
    
    180
    
    
    
    345Fair value of plan assets at January 1
    
    
    1,988
    
    
    
    1,938
    
    
    
    
    
    
    
    Change in plan assets:Actual return on plan assets
    
    
    164
    
    
    
    200
    
    
    
    
    
    
    
    Company contributions
    
    
    37
    
    
    
    25
    
    
    
    22
    
    
    
    23Participants contributions
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    8Curtailment/settlement
    
    
    (1
    )
    
    
    (28
    )
    
    
    
    
    
    
    Benefits paid
    
    
    (164
    )
    
    
    (151
    )
    
    
    (31
    )
    
    
    (31
    )Foreign currency translation
    
    
    5
    
    
    
    4
    
    
    
    
    
    
    
    Fair value of plan assets at December 31
    
    
    2,029
    
    
    
    1,988
    
    
    
    
    
    
    
    Funded status
    
    
    (498
    )
    
    
    (415
    )
    
    
    (180
    )
    
    
    (345
    )Unrecognized net actuarial loss
    
    
    468
    
    
    
    390
    
    
    
    77
    
    
    
    108Unrecognized prior service cost (benefit)
    
    
    9
    
    
    
    11
    
    
    
    (202
    )
    
    
    (85
    )Prepaid (accrued) benefit cost
    
    $
    (21
    )
    
    $
    (14
    )
    
    $
    (305
    )
    
    $
    (322
    )Amounts recognized in the Consolidated Balance Sheets:Prepaid benefit cost
    
    $
    21
    
    
    $
    10
    
    
    $
    
    
    
    $
    Accrued benefit liability
    
    
    (352
    )
    
    
    (235
    )
    
    
    (305
    )
    
    
    (322
    )Intangible assets
    
    
    11
    
    
    
    13
    
    
    
    
    
    
    
    Accumulated other comprehensive income
    
    
    299
    
    
    
    198
    
    
    
    
    
    
    
    Prepaid (accrued) benefit cost
    
    $
    (21
    )
    
    $
    (14
    )
    
    $
    (305
    )
    
    $
    (322
    )
 The accumulated benefit obligation for all defined benefit pension plans was $2,318 million
and $2,214 million at December 31, 2004 and 2003. 150




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##### Table of Contents



The components of net periodic benefit costs are presented in the following table. Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Pension benefitsService cost
    
    $
    31
    
    
    $
    33
    
    
    $
    34Interest cost on projected benefit obligation
    
    
    145
    
    
    
    146
    
    
    
    141Expected return on plan assets
    
    
    (152
    )
    
    
    (146
    )
    
    
    (141
    )Prior service cost amortization
    
    
    2
    
    
    
    3
    
    
    
    3Actuarial loss
    
    
    13
    
    
    
    8
    
    
    
    4Curtailment gain
    
    
    
    
    
    
    
    
    
    
    (8
    )Settlement loss
    
    
    5
    
    
    
    8
    
    
    
    11Net periodic pension cost
    
    $
    44
    
    
    $
    52
    
    
    $
    44Postretirement benefitsService cost
    
    $
    4
    
    
    $
    6
    
    
    $
    5Interest cost on projected benefit obligation
    
    
    17
    
    
    
    22
    
    
    
    25Prior service cost amortization
    
    
    (20
    )
    
    
    (16
    )
    
    
    (16
    )Actuarial loss
    
    
    3
    
    
    
    4
    
    
    
    5Net periodic postretirement cost
    
    $
    4
    
    
    $
    16
    
    
    $
    19Pension benefitsIncrease (decrease) in minimum liability
included in other comprehensive income
    
    $
    101
    
    
    $
    176
    
    
    $
    (2
    )
 Weighted-average actuarial assumptions used at December 31, 2004, 2003, and 2002 to determine
benefit obligations are set forth in the following table. Weighted-Average Actuarial Assumptions for Benefit Obligations December 31
    
    2004
    
    2003
    
    2002Pension benefitsDiscount rate
    
    
    5.875
    %
    
    
    6.25
    %
    
    
    6.75
    %Expected return on plan assets
    
    
    8.00
    
    
    
    8.00
    
    
    
    8.00Rate of compensation increases
    
    
    5.83
    
    
    
    5.83
    
    
    
    5.83Postretirement benefitsDiscount rate
    
    
    5.875
    %
    
    
    6.25
    %
    
    
    6.75
    %
 Weighted-average actuarial assumptions used to determine net cost for the years ended December
31, 2004, 2003 and 2002 are set forth in the following table. Weighted-Average Actuarial Assumptions for Net Cost December 31
    
    2004
    
    2003
    
    2002Pension benefitsDiscount rate
    
    
    6.22
    %
    
    
    6.75
    %
    
    
    7.25
    %Expected return on plan assets
    
    
    8.00
    
    
    
    8.00
    
    
    
    8.00Rate of compensation increases
    
    
    5.83
    
    
    
    5.83
    
    
    
    5.83Postretirement benefitsDiscount rate
    
    
    6.19
    %
    
    
    6.75
    %
    
    
    7.25
    %
 151




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##### Table of Contents



The long term rate of return for plan assets is determined using a building block approach
based on widely-accepted capital market principles, long term return analysis for global fixed
income and equity markets as well as the active total return oriented portfolio management style.
Long term trends are evaluated relative to current market factors such as inflation, interest rates
and fiscal and monetary policies, in order to assess the capital market assumptions as applied to
the plan. Consideration of diversification needs and rebalancing is maintained. The Company has limited its share of the health care trend rate to a cost-of-living adjustment not
to exceed 4% per year. The assumed healthcare cost trend rate used in measuring the accumulated
postretirement benefit obligation was 4% per year in 2004, 2003 and 2002. The healthcare cost
trend rate assumption has a significant effect on the amount of the benefit obligation and periodic
cost reported. An increase in the assumed healthcare cost trend rate of 1% in each year would have
no impact on the accumulated postretirement benefit obligation or the aggregate net periodic
postretirement benefit cost for 2004 as the cost-of-living adjustment is estimated to be 4% which
is the maximum contractual benefit. A decrease in the assumed healthcare cost trend rate of 1% in
each year would decrease the accumulated postretirement benefit obligation as of December 31, 2004
by $9 million and the aggregate net periodic postretirement benefit cost for 2004 by $1 million. The Companys pension plan weighted-average asset allocation at December 31, 2004 and 2003, by
asset category, is as follows: Pension Plan Assets Percentage of Plan AssetsDecember 31,2004
    
    2003Asset CategoryFixed maturity securities
    
    
    47
    %
    
    
    56
    %Equity securities
    
    
    17
    
    
    
    13Limited Partnerships
    
    
    15
    
    
    
    11Short term investments
    
    
    21
    
    
    
    20Total
    
    
    100
    %
    
    
    100
    %
 CNA employs a total return approach whereby a mix of equity and fixed maturity securities are
used to maximize the long term return of plan assets for a prudent level of risk. The intent of
this strategy is to minimize plan expenses by outperforming plan liabilities over the long run.
Risk tolerance is established through careful consideration of the plan liabilities, plan funded
status and corporate financial conditions. The investment portfolio contains a diversified blend of
fixed maturity, equity and short-term securities. Alternative investments, including hedge funds,
are used judiciously to enhance risk adjusted long term returns while improving portfolio
diversification. Derivatives may be used to gain market exposure in an efficient and timely manner.
Investment risk is measured and monitored on an ongoing basis through annual liability
measurements, periodic asset/liability studies and quarterly investment portfolio reviews. The table below presents the estimated future minimum benefit payments to participants at December
31, 2004. Estimated Future Benefit Payments to Participants Pension
    
    Postretirement(In millions)
    
    Benefits
    
    Benefits2005
    
    $
    137
    
    
    $
    152006
    
    
    138
    
    
    
    142007
    
    
    139
    
    
    
    142008
    
    
    141
    
    
    
    132009
    
    
    144
    
    
    
    13Thereafter
    
    
    777
    
    
    
    71Total
    
    $
    1,476
    
    
    $
    140
 152




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##### Table of Contents



In 2005, CNA expects to contribute $7 million to its pension plan and $14 million to its
postretirement healthcare and life insurance benefit plans. Savings Plans CNA sponsors savings plans, which are generally contributory plans that allow most employees to
contribute a maximum of 20% of their eligible compensation, subject to certain limitations
prescribed by the Internal Revenue Service. The Company contributes matching amounts to
participants, amounting to 70% of the first 6% (35% of the first 6% in the first year of
employment) of eligible compensation contributed by the employee. Employees vest in these
contributions ratably over five years. As noted above, during 2000, CCC employees were required to make a choice regarding their continued
participation in CCCs defined benefit pension plan. Employees who elected to forego earning
additional benefits in the defined benefit pension plan and all employees hired by CCC on or after
January 1, 2000 receive a Company contribution of 3% or 5% of their eligible compensation,
depending on their age. In addition, these employees are eligible to receive additional discretionary contributions of up
to 2% of eligible compensation and an additional Company match of up to 80% of the first 6% of
eligible compensation contributed by the employee. These contributions are made at the discretion
of management and are contributed to participant accounts in the first quarter of the year
following managements determination of the discretionary amounts. Employees do not vest in these
contributions until reaching five years of service. Benefit expense for the Companys savings plans was $49 million, $57 million and $51 million in
2004, 2003 and 2002. Stock Options The Board of Directors approved the CNA Long Term Incentive Plan (the LTI Plan) during 1999 and
subsequently merged it with the CNA Financial Corporation Incentive Compensation Plan in February
2000. The LTI Plan authorizes the grant of options to certain management personnel for up to 2.0
million shares of the Companys common stock. All options granted have ten-year terms and vest
ratably over the four-year period following the date of grant. The number of shares available for
the granting of options under the LTI Plan as of December 31, 2004, was approximately 0.5 million. The following table presents activity under the LTI Plan during 2004, 2003 and 2002. Option Plan Activity 2004
    
    2003
    
    2002Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageOption
    
    
    
    
    
    Option
    
    
    
    
    
    OptionNumber
    
    Price per
    
    Number
    
    Price per
    
    Number
    
    Price perOf Shares
    
    Share
    
    Of Shares
    
    Share
    
    Of Shares
    
    ShareBalance at January 1
    
    
    1,434,800
    
    
    $
    29.97
    
    
    
    1,146,850
    
    
    $
    31.80
    
    
    
    892,100
    
    
    $
    33.43Options granted
    
    
    350,400
    
    
    
    26.30
    
    
    
    384,000
    
    
    
    24.61
    
    
    
    440,200
    
    
    
    28.93Options exercised
    
    
    (2,900
    )
    
    
    26.28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    (308,300
    )
    
    
    29.63
    
    
    
    (96,050
    )
    
    
    30.51
    
    
    
    (185,450
    )
    
    
    32.79Balance at December 31
    
    
    1,474,000
    
    
    $
    29.17
    
    
    
    1,434,800
    
    
    $
    29.97
    
    
    
    1,146,850
    
    
    $
    31.80Options exercisable at December 31
    
    
    827,450
    
    
    $
    31.16
    
    
    
    551,575
    
    
    $
    32.73
    
    
    
    306,975
    
    
    $
    33.63Weighted-average fair value per
share of options granted
    
    
    
    
    
    $
    7.74
    
    
    
    
    
    
    $
    5.43
    
    
    
    
    
    
    $
    6.45
 153




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##### Table of Contents



The weighted-average remaining contractual life of options outstanding as of December 31,
2004, was seven years, and the range of exercise prices on those options was $21.77 to $37.45. The fair value of granted options was estimated at the grant date using the Black-Scholes
option-pricing model. The weighted-average fair value of options granted during each of the three
years ended December 31, 2004, 2003 and 2002 was $3 million, $2 million and $3 million. The
following weighted-average assumptions were used for the years ended December 31, 2004, 2003 and
2002: risk free interest rate of 3.7%, 2.7%, and 4.0%; expected dividend yield of 0%; and expected
option life of five years. The weighted-average assumption for the expected stock price volatility
was 24.8%, 25.0% and 25.2% for the years ended December 31, 2004, 2003 and 2002. CNA Surety has reserved shares of its common stock for issuance to directors, officers and
employees of CNA Surety through incentive stock options, non-qualified stock options and stock
appreciation rights under separate plans (CNA Surety Plans). The CNA Surety Plans have an
aggregate number of 0.7 million shares available for which options may be granted. At December 31,
2004, approximately 1.7 million options were outstanding under these plans. Note K. Operating Leases, Other Commitments and Contingencies, and Guarantees Operating Leases CNA occupies office facilities under lease agreements that expire at various dates. In addition,
data processing, office and transportation equipment is leased under agreements that expire at
various dates through 2009. Most leases contain renewal options that provide for rent increases
based on prevailing market conditions. Lease expense for the years ended December 31, 2004, 2003
and 2002 was $70 million, $66 million, and $78 million. Lease and sublease revenues for the years
ended December 31, 2004, 2003 and 2002 were $7 million, $6 million, and $9 million. CCC and CAC
remain contingently liable under two ground leases covering a portion of an office building
property sold in 2003. Although the two leases expire in 2058, CCC and CAC have certain
collateral, as well as certain contractual rights and remedies, in place to minimize any exposure
that may arise from the new owners failure to comply with its obligations under the ground leases. The table below presents the future minimum lease payments to be made under non-cancelable
operating leases along with future minimum sublease receipts to be received on owned and leased
properties at December 31, 2004. Future Minimum Lease Payments and Sublease Receipts Future
    
    FutureMinimum
    
    MinimumLease
    
    Sublease(In millions)
    
    Payments
    
    Receipts2005
    
    $
    64
    
    
    $
    42006
    
    
    55
    
    
    
    32007
    
    
    46
    
    
    
    12008
    
    
    33
    
    
    
    12009
    
    
    23
    
    
    
    1Thereafter
    
    
    72
    
    
    
    4Total
    
    $
    293
    
    
    $
    14
 CNAF has provided parent company guarantees, which expire in 2015, related to lease
obligations of certain subsidiaries. Certain of those subsidiaries have been sold; however, the
lease guarantees remain in effect. CNAF would be required to remit prompt payment on leases in
question if the primary obligor fails to observe and perform its covenants under the lease
agreements. The maximum potential amount of future payments that the Company could be required to
pay under these guarantees are approximately $8 million at December 31, 2004. The Company holds an investment in a real estate joint venture that is accounted for on the equity
basis of accounting. CNA on a joint and several basis with other unrelated insurance company
shareholders have committed to continue funding the operating deficits of this joint venture.
Additionally, CNA and the other unrelated 154




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shareholders, on a joint and several basis, have
guaranteed an operating lease for an office building which expires in 2016. The guarantee of the operating lease is a parallel guarantee to the commitment to fund operating
deficits; consequently, the separate guarantee to the lessor is not expected to be triggered as
long as the joint venture continues to be funded by its shareholders and continues to make its
annual lease payments. In the event that the other parties to the joint venture are unable to meet their commitments in
funding the operations of this joint venture, the Company would be required to assume the
obligation for the entire office building operating lease. The maximum potential future lease
payments at December 31, 2004 that the Company could be required to pay under this guarantee is
approximately $312 million. If CNA was required to assume the entire lease obligation, the Company
would have the right to pursue reimbursement from the other shareholders and would have the right
to all sublease revenues. Other Commitments and Contingencies In the normal course of business, CNA has obtained letters of credit in favor of various
unaffiliated insurance companies, regulatory authorities and other entities. At December 31, 2004
and 2003, there were approximately $47 million and $58 million of outstanding letters of credit. The Company has entered into a limited number of guaranteed payment contracts, primarily relating
to telecommunication and software services, amounting to approximately $36 million. Estimated
future minimum payments under these contracts are as follows: $19 million in 2005, $11 million in
2006 and $6 million in 2007. The Company currently has an agreement in place for services to be rendered in relation to employee
benefits, administration and consulting. If the Company terminates this agreement without cause,
or the agreement is terminated due to the Companys default, prior to the end of any renewal term,
the Company shall pay the greater of fifteen percent of the average monthly fees related to such
services for the remainder of the term, or the specified minimum termination fee for the year. The
minimum termination fee for the year ended December 31, 2005 is $9 million. During 2002, CNAF sold $750 million of a new issue of preferred stock, designated Series H
Cumulative Preferred Issue (Series H Issue), to Loews. The Series H Issue accrues cumulative
dividends at an initial rate of 8% per year, compounded annually. As of December 31, 2004, the
Company had $127 million of undeclared (and therefore unrecorded) but accumulated dividends. Guarantees The Company has provided guarantees related to irrevocable standby letters of credit for certain of
its subsidiaries. Certain of these subsidiaries have been sold; however, the irrevocable standby
letter of credit guarantees remain in effect. The Company would be required to make payment on the
letters of credit in question if the primary obligor drew down on these letters of credit and
failed to repay such loans in accordance with the terms of the letters of credit. The maximum
potential amount of future payments that CNA could be required to pay under these guarantees is
approximately $30 million at December 31, 2004. CNA has provided guarantees of the indebtedness of certain of its independent insurance producers,
which expire in 2008. The Company would be required to remit prompt and complete payment when due,
should the primary obligor default. In the event of default on the part of the primary obligor,
the Company holds an interest in and to any and all shares of common stock of the primary obligor.
The maximum potential amount of future payments that CNA could be required to pay under these
guarantees is approximately $7 million at December 31, 2004. In the course of selling business entities and assets to third parties, the Company has agreed to
indemnify purchasers for losses arising out of breaches of representation and warranties with
respect to the business entities or assets being
sold, including, in certain cases, losses arising from undisclosed liabilities or certain named
litigation. Such indemnification provisions generally survive for periods ranging from nine months
following the applicable closing 155




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date to the expiration of the relevant statutes of limitation. As of December 31, 2004, the
aggregate amount of quantifiable indemnification agreements in effect for sales of business
entities and assets was $950 million. In addition, the Company has agreed to provide indemnification to third party purchasers for
certain losses associated with sold business entities or assets that are not limited by a
contractual monetary amount. As of December 31, 2004, the Company had outstanding unlimited
indemnifications in connection with the sales of certain of its business entities or assets for tax
liabilities arising prior to a purchasers ownership of an entity or asset, defects in title at the
time of sale, employee claims arising prior to closing and in some cases losses arising from
certain litigation and undisclosed liabilities. These indemnification agreements survive until the
applicable statutes of limitation expire, or until the agreed upon contract terms expire. As of
December 31, 2004, the Company has recorded approximately $21 million of liabilities related to
these indemnification agreements. In connection with the issuance of preferred securities by CNA Surety Capital Trust I, CNA Surety
issued a guarantee of $75 million to guarantee the payment by CNA Surety Capital Trust I of annual
dividends of $1.5 million over 30 years and redemption of $30 million of preferred securities. See
Note I for further description of debentures issued by CNA Surety, which are the sole assets of CNA
Surety Capital Trust I. Note L. Stockholders Equity and Statutory Financial Information Capital stock (in whole numbers) is composed of the following: Summary of Capital Stock December 31
    
    2004
    
    2003Preferred stock, without par value, non-votingAuthorized
    
    
    12,500,000
    
    
    
    12,500,000Issued and outstanding:Series H (stated value $100,000 per share, held by Loews)
    
    
    7,500
    
    
    
    7,500Series I (stated value $23,200 per share, held by Loews)
    
    
    
    
    
    
    32,327Common stock, par value $2.50Authorized
    
    
    500,000,000
    
    
    
    500,000,000Issued
    
    
    258,177,285
    
    
    
    225,850,270Outstanding
    
    
    255,953,958
    
    
    
    223,617,337Treasury stock
    
    
    2,223,327
    
    
    
    2,232,933
 On April 20, 2004, CNAF issued 32,327,015 shares of common stock to Loews in conjunction with
the conversion of the $750 million Series I convertible preferred stock issued during 2003. The
number of shares was determined utilizing a conversion price per share of common stock that was
based on average market prices of CNAF common stock from November 17, 2003 through November 21,
2003. The Series I convertible preferred stock was sold to Loews during 2003 and the proceeds were
applied by CNAF to increase the statutory surplus of CNAFs principal insurance subsidiary, CCC. During 2002, CNAF sold $750 million of a then new issue of preferred stock, designated Series H
Cumulative Preferred Issue (Series H Issue), to Loews. The terms of the Series H Issue were
approved by a special committee of independent members of CNAFs Board of Directors. The proceeds
from the Series H Issue were applied by CNAF to increase the statutory surplus of CNAFs principal
insurance subsidiary, CCC. The Series H Issue accrues cumulative dividends at an initial rate of 8% per year, compounded
annually. It will be adjusted quarterly to a rate equal to 400 basis points above the ten-year
U.S. Treasury rate beginning with the quarterly dividend after the first triggering event to occur
of either (i) an increase by two intermediate rating levels of the financial strength rating of CCC
from its rating at the time of issuance by any of A.M. Best Company, Standard & Poors or Moodys
or (ii) one year following an increase by one intermediate rating level of the financial strength
rating of CCC by any one of those rating agencies. Accrued but unpaid cumulative dividends cannot
be paid on the Series H Issue unless and until one of the two triggering events described above has
occurred. Beginning with the quarter following an increase of one intermediate rating level in
CCCs financial strength rating, 156




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however, current (but not accrued cumulative) quarterly dividends can be paid. As of December 31,
2004, the Company has $127 million of undeclared (and therefore unrecorded) but accumulated
dividends. The Series H Issue is senior to CNAFs common stock as to the payment of dividends and amounts
payable upon any liquidation, dissolution or winding up. No dividends may be declared on CNAFs
common stock until all cumulative dividends on the Series H Issue have been paid. CNAF may not
issue any equity securities ranking senior to or on par with the Series H Issue without the consent
of a majority of its stockholders. The Series H Issue is non-voting and is not convertible into
any other securities of CNAF. It may be redeemed only upon the mutual agreement of CNAF and a
majority of the stockholders of the preferred stock. CNAs Board of Directors has approved a Share Repurchase Program to purchase, in the open market or
through privately negotiated transactions, its outstanding common stock, as Company management
deems appropriate. No shares of common stock were purchased during 2004 or 2003. Statutory Accounting Practices (Unaudited) CNAs insurance subsidiaries maintain their accounts in conformity with accounting practices
prescribed or permitted by state insurance regulatory authorities which vary in certain respects
from GAAP. In converting from statutory to GAAP, typical adjustments include deferral of policy
acquisition costs and the inclusion of net realized holding gains or losses in shareholders equity
relating to fixed maturity securities. The National Association of Insurance Commissioners (NAIC)
developed a codified version of statutory accounting principles, designed to foster more
consistency among the states for accounting guidelines and reporting. CNAs insurance subsidiaries are domiciled in various jurisdictions. These subsidiaries prepare
statutory financial statements in accordance with accounting practices prescribed or permitted by
the respective jurisdictions insurance regulators. Prescribed statutory accounting practices are
set forth in a variety of publications of the NAIC as well as state laws, regulations and general
administrative rules. During 2003 and 2004, CCC received approval from its domiciliary state insurance department for a
permitted practice related to the statutory provision for reinsurance, or the uncollectible
reinsurance reserve. This permitted practice allows CCC to record an additional uncollectible
reinsurance reserve amount through a different financial statement line item than the prescribed
statutory convention. This permitted practice had no effect on CCCs statutory surplus in 2003 or
2004. During 2003, two of the Companys insurance subsidiaries received approval from their respective
domiciliary state insurance departments for two permitted practices related to the statutory
provision for reinsurance, or the uncollectible reinsurance reserve. The two permitted practices
allowed CCC to reflect in its financial statements the statutory provision for reinsurance
attributable to The Continental Insurance Company (CIC) as a result of a reinsurance agreement
implemented in the fourth quarter of 2003 between these two companies. During 2004, the Companys
subsidiaries continued to utilize this accounting treatment with the approval of the respective
domiciliary state insurance departments. However, in 2004 it was determined by the domiciliary
state insurance departments that this accounting treatment is no longer considered a permitted
practice. This accounting treatment had no effect on the combined statutory surplus for these two
subsidiaries in 2004 or 2003. During 2004, CIC received approval from its domiciliary state insurance department for a permitted
practice that allows CIC to classify voluntary pools as authorized, that are unauthorized in South Carolina but
were classified as authorized in New Hampshire, CICs former state of domicile, in order to allow
credit for the related reinsurance balances. Due to CICs redomestication to South Carolina
effective January 1, 2004, this permitted practice was requested and has been granted for the
reporting periods March 31, 2004 through December 31, 2004. This permitted practice was intended
to allow CIC time to work with its domiciliary state insurance department to better understand the
appropriate treatment of voluntary pools for Schedule F purposes on a South Carolina basis. The
Company has now determined that pool members representing approximately 80% of the participation in
the underlying pools are either currently licensed or authorized in the State of South Carolina. As
of December 31, 2004, the ceded reserve credit for the entire reinsurance recoverable from
voluntary pools classified as authorized is $306 million. The 157




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impact of this permitted practice on CICs statutory surplus has not been fully quantified as the
Companys review with its domiciliary state insurance department is still in process. CNAFs ability to pay dividends and other credit obligations is significantly dependent on receipt
of dividends from its subsidiaries. The payment of dividends to CNAF by its insurance subsidiaries
without prior approval of the insurance department of each subsidiarys domiciliary jurisdiction is
limited by formula. Dividends in excess of these amounts are subject to prior approval by the
respective state insurance departments. Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the
domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require
prior approval of the Illinois Department of Financial and Professional Regulation  Division of
Insurance (the Department), may be paid only from earned surplus, which is calculated by removing
unrealized gains from unassigned surplus. As of December 31, 2004, CCC is in a negative earned
surplus position. In December of 2004, the Department approved extraordinary dividend capacity of
$125 million to be used to fund the CNAFs 2005 debt service requirements. It is anticipated that
CCC will be in a positive earned surplus position at the end of the first quarter of 2005 and be
able to begin paying ordinary dividends in the second quarter of 2005 as a result of a $500 million
dividend received from its subsidiary, CAC, on February 11, 2005. CNAs domestic insurance subsidiaries are subject to risk-based capital requirements. Risk-based
capital is a method developed by the NAIC to determine the minimum amount of statutory capital
appropriate for an insurance company to support its overall business operations in consideration of
its size and risk profile. The formula for determining the amount of risk-based capital specifies
various factors, weighted based on the perceived degree of risk, which are applied to certain
financial balances and financial activity. The adequacy of a companys actual capital is evaluated
by a comparison to the risk-based capital results, as determined by the formula. Companies below
minimum risk-based capital requirements are classified within certain levels, each of which
requires specified corrective action. As of December 31, 2004 and 2003, all of CNAs domestic
insurance subsidiaries exceeded the minimum risk-based capital requirements. As a result of the adverse charges taken in 2003, a capital plan was developed which involved,
among other actions, the issuance of CCC surplus notes to Loews. Surplus notes are financial
instruments with a stated maturity date and scheduled interest payments, issued by insurance
enterprises with the approval of the insurers domiciliary state. All payments of interest and
principal on these notes are subject to the prior approval of the Illinois Insurance Department.
Surplus notes are included as surplus for statutory accounting purposes, but are classified as debt
instruments under GAAP. The CCC surplus notes issued in February of 2004 were repaid to Loews as
of December 31, 2004. Combined statutory capital and surplus and net income (loss), determined in accordance with
accounting practices prescribed or permitted by insurance regulatory authorities for the property
and casualty and the life and group insurance subsidiaries, were as follows. Preliminary Statutory Information Statutory Capital and Surplus
    
    Statutory Net (Loss) IncomeDecember 31 (a)
    
    Years Ended December 31(In millions)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2002Property and casualty companies
    
    $
    6,998
    
    
    $
    6,170
    
    
    $
    661
    
    
    $
    (1,484
    )
    
    $
    731Life and group insurance companies
    
    
    1,178
    
    
    
    707
    
    
    
    334
    
    
    
    115
    
    
    
    37
  (a)
    Surplus includes the property and casualty companies equity ownership of the life and group
company(ies) capital and surplus. 158




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##### Table of Contents



Note M. Comprehensive Income Comprehensive income (loss) is composed of all changes to stockholders equity, except those
changes resulting from transactions with stockholders in their capacity as owners. The components
of comprehensive income (loss) are shown below. Comprehensive Income (Loss) Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Net income (loss)
    
    $
    441
    
    
    $
    (1,433
    )
    
    $
    155Other comprehensive income (loss):Change in unrealized gains/losses on general account investments:Holding gains arising during the period
    
    
    486
    
    
    
    262
    
    
    
    305Net unrealized gains/losses at beginning of period included in
realized gains/losses during the period
    
    
    (637
    )
    
    
    199
    
    
    
    237Net change in unrealized gains/losses on general account
investments
    
    
    (151
    )
    
    
    461
    
    
    
    542Net change in unrealized gains on separate accounts and other
    
    
    (66
    )
    
    
    6
    
    
    
    53Foreign currency translation adjustment
    
    
    22
    
    
    
    50
    
    
    
    (18
    )Net change in derivative instruments designated as cash flow hedge
    
    
    (4
    )
    
    
    
    
    
    
    Net change in minimum pension liability
    
    
    (101
    )
    
    
    (176
    )
    
    
    2Allocation to participating policyholders and minority interests
    
    
    19
    
    
    
    (7
    )
    
    
    (19
    )Other comprehensive income (loss), before tax and cumulative effect
of change in accounting principles
    
    
    (281
    )
    
    
    334
    
    
    
    560Deferred income tax (expense) benefit related to other
comprehensive income (loss)
    
    
    90
    
    
    
    (97
    )
    
    
    (182
    )Other comprehensive income (loss), net of tax
    
    
    (191
    )
    
    
    237
    
    
    
    378Total comprehensive income (loss)
    
    $
    250
    
    
    $
    (1,196
    )
    
    $
    533
 In the preceding table, deferred income tax benefit and expense related to other comprehensive
income is attributable to each of the components of other comprehensive income in equal proportion
except for the foreign currency translation adjustment, for which there are no deferred taxes. The following table displays the components of accumulated other comprehensive income included in
the Consolidated Balance Sheets. Accumulated Other Comprehensive Income December 31(In millions)
    
    2004
    
    2003Cumulative foreign currency translation adjustment
    
    $
    63
    
    
    $
    41Minimum pension liability, net of tax of $105 and $69
    
    
    (194
    )
    
    
    (129
    )Net unrealized gains on investments and other, net of tax of $430 and $484
    
    
    781
    
    
    
    929Accumulated other comprehensive income
    
    $
    650
    
    
    $
    841
 Note N. Business Segments As a result of the Companys decisions to focus on property and casualty operations and to exit
certain businesses, the Company revised its reportable segment structure in the first quarter of
2004 to reflect the changes in its core operations and how management makes business decisions.
CNAs core property and casualty insurance operations are now reported in two business segments:
Standard Lines and Specialty Lines. CNAs non-core operations are managed in two segments: Life
and Group Non-Core and Corporate and Other Non-Core. Standard Lines includes standard property and
casualty coverages sold to small and middle market commercial businesses primarily through an
independent agency distribution system, and excess and surplus lines, as well as insurance and risk
management 159




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##### Table of Contents



products sold to large corporations in the U.S. as well as globally. Specialty Lines provides a
broad array of professional, financial and specialty property and casualty products and services.
Life and Group Non-Core primarily includes the results of the life and group lines of business sold
or placed in run-off. Corporate and Other Non-Core primarily includes the results of certain
property and casualty lines of business placed in run-off, including CNA Re (formerly a stand-alone
property and casualty segment). This segment also includes the results related to the centralized
adjusting and settlement of APMT claims as well as the results of CNAs participation in voluntary
insurance pools, which are primarily in run-off, and various other non-insurance operations. Prior
period segment disclosures have been conformed to the current year presentation. The changes made to the Companys reportable segments were as follows: 1) CNA Global (formerly
included in Specialty Lines) which consists of marine and global standard lines is now included in
Standard Lines; 2) CNA Guaranty and Credit (formerly included in Specialty Lines) is currently in
run-off and is now included in the Corporate and Other Non-Core segment; 3) CNA Re is currently in
run-off and is also now included in the Corporate and Other Non-Core segment; 4) Group Operations
and Life Operations (formerly separate reportable segments) have now been combined into one
reportable segment where the run-off of the retained group and life products will be managed; 5)
certain run-off life and group operations formerly included in the Corporate and Other segment are
now included in the Life and Group Non-Core segment. The accounting policies of the segments are the same as those described in Note A. The Company
manages most of its assets on a legal entity basis, while segment operations are conducted across
legal entities. As such, only insurance and reinsurance receivables, insurance reserves and
deferred acquisition costs are readily identifiable by individual segment. Distinct investment
portfolios are not maintained for each segment; accordingly, allocation of assets to each segment
is not performed. Therefore, net investment income and realized investment gains/losses are
allocated primarily based on each segments net carried insurance reserves, as adjusted. All significant intrasegment income and expense has been eliminated. Standard Lines other
revenues and expenses include revenues for services provided by CNA ClaimsPlus and RSKCo to other
units within the Standard Lines segment that are eliminated at the consolidated level.
Intrasegment revenue and expenses eliminated at the consolidated level were approximately $93
million, $116 million and $130 million for the years ended December 31, 2004, 2003 and 2002. Income taxes have been allocated on the basis of the taxable income of the segments. Approximately 5.0%, 3.2% and 3.5% of CNAs gross written premiums were derived from outside the
United States, primarily the United Kingdom, for the years ended December 31, 2004, 2003 and 2002.
Gross written premiums from the United Kingdom were approximately 2.3%, 1.8% and 1.7% of CNAs
premiums for the years ended December 31, 2004, 2003 and 2002. Gross written premiums from any
individual foreign country, other than the United Kingdom, were not significant. In the following three tables, certain financial measures are presented to provide information used
by management to monitor the Companys operating performance. Management utilizes these financial
measures to monitor the Companys insurance operations and investment portfolio. Net operating
income, which is derived from certain income statement amounts, is used by management to monitor
performance of the Companys insurance operations. The Companys investment portfolio is monitored
through analysis of various quantitative and qualitative factors and certain decisions related to
the sale or impairment of investments that produce realized gains and losses. Net realized
investment gains and losses are comprised of after-tax realized investment gains and losses
net of participating policyholders and minority interests. Net operating income is calculated by excluding from net income the after-tax effects of 1) net
realized investment gains or losses, 2) gains or losses from discontinued operations and 3)
cumulative effects of changes in accounting principles. In the calculation of net operating
income, management excludes after-tax net realized investment gains or losses because net realized
investment gains or losses related to the Companys available-for-sale investment portfolio are
largely discretionary, except for losses related to other-than-temporary impairments, are generally
driven by economic factors that are not necessarily consistent with key drivers of underwriting
performance, and are therefore not an indication of trends in insurance operations. 160




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##### Table of Contents



The Companys investment portfolio is monitored by management through analyses of various factors
including unrealized gains and losses on securities, portfolio duration and exposure to interest
rate, market and credit risk. Based on such analyses, the Company may impair an investment
security in accordance with its policy, or sell a security. Such activities will produce realized
gains and losses. 161




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##### Table of Contents



CorporateStandard
    
    Specialty
    
    Life and Group
    
    and OtherYear ended December 31, 2004(In millions)
    
    Lines
    
    Lines
    
    Non-Core
    
    Non-Core
    
    Eliminations
    
    TotalNet earned premiums
    
    $
    4,917
    
    
    $
    2,277
    
    
    $
    921
    
    
    $
    128
    
    
    $
    (34
    )
    
    $
    8,209Net investment income
    
    
    495
    
    
    
    246
    
    
    
    692
    
    
    
    241
    
    
    
    
    
    
    
    1,674Other revenues
    
    
    129
    
    
    
    121
    
    
    
    91
    
    
    
    40
    
    
    
    (86
    )
    
    
    295Total operating revenues
    
    
    5,541
    
    
    
    2,644
    
    
    
    1,704
    
    
    
    409
    
    
    
    (120
    )
    
    
    10,178Claims, benefits and expenses:Net incurred
claims and benefits
    
    
    3,478
    
    
    
    1,441
    
    
    
    1,372
    
    
    
    165
    
    
    
    (21
    )
    
    
    6,435Policyholders dividends
    
    
    9
    
    
    
    5
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    11Amortization of deferred acquisition costs
    
    
    1,109
    
    
    
    506
    
    
    
    36
    
    
    
    29
    
    
    
    
    
    
    
    1,680Other insurance related expenses
    
    
    593
    
    
    
    88
    
    
    
    291
    
    
    
    10
    
    
    
    (13
    )
    
    
    969Other operating expenses
    
    
    94
    
    
    
    113
    
    
    
    76
    
    
    
    141
    
    
    
    (86
    )
    
    
    338Total claims, benefits and expenses
    
    
    5,283
    
    
    
    2,153
    
    
    
    1,772
    
    
    
    345
    
    
    
    (120
    )
    
    
    9,433Operating income (loss) from continuing
operations before income tax and minority
interest
    
    
    258
    
    
    
    491
    
    
    
    (68
    )
    
    
    64
    
    
    
    
    
    
    
    745Income tax (expense) benefit on operating income
    
    
    (27
    )
    
    
    (150
    )
    
    
    39
    
    
    
    14
    
    
    
    
    
    
    
    (124
    )Minority interest
    
    
    (10
    )
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27
    )Net operating income (loss) from continuing
operations
    
    
    221
    
    
    
    324
    
    
    
    (29
    )
    
    
    78
    
    
    
    
    
    
    
    594Realized investment gains (losses), net of
participating policyholders and minority
interests
    
    
    219
    
    
    
    84
    
    
    
    (615
    )
    
    
    64
    
    
    
    
    
    
    
    (248
    )Income tax (expense) benefit on realized
investment gains (losses)
    
    
    (80
    )
    
    
    (30
    )
    
    
    230
    
    
    
    (25
    )
    
    
    
    
    
    
    95Net income (loss)
    
    $
    360
    
    
    $
    378
    
    
    $
    (414
    )
    
    $
    117
    
    
    $
    
    
    
    $
    441Reinsurance receivables
    
    $
    5,135
    
    
    $
    1,682
    
    
    $
    3,284
    
    
    $
    5,893
    
    
    $
    
    
    
    $
    15,994Insurance receivables
    
    $
    2,013
    
    
    $
    340
    
    
    $
    153
    
    
    $
    61
    
    
    $
    
    
    
    $
    2,567Insurance reserves:Claim and claim adjustment expense
    
    $
    14,302
    
    
    $
    4,860
    
    
    $
    3,680
    
    
    $
    8,678
    
    
    $
    
    
    
    $
    31,520Unearned premiums
    
    
    1,978
    
    
    
    1,546
    
    
    
    164
    
    
    
    834
    
    
    
    
    
    
    
    4,522Future policy benefits
    
    
    
    
    
    
    
    
    
    
    5,883
    
    
    
    
    
    
    
    
    
    
    
    5,883Policyholders funds
    
    
    43
    
    
    
    
    
    
    
    1,682
    
    
    
    
    
    
    
    
    
    
    
    1,725Deferred acquisition costs
    
    $
    444
    
    
    $
    285
    
    
    $
    537
    
    
    $
    2
    
    
    $
    
    
    
    $
    1,268
 162




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##### Table of Contents



CorporateStandard
    
    Specialty
    
    Life and Group
    
    and OtherYear ended December 31, 2003(In millions)
    
    Lines
    
    Lines
    
    Non-Core
    
    Non-Core
    
    Eliminations
    
    TotalNet earned premiums
    
    $
    4,530
    
    
    $
    1,840
    
    
    $
    2,376
    
    
    $
    582
    
    
    $
    (114
    )
    
    $
    9,214Net investment income
    
    
    407
    
    
    
    201
    
    
    
    821
    
    
    
    218
    
    
    
    
    
    
    
    1,647Other revenues
    
    
    199
    
    
    
    116
    
    
    
    163
    
    
    
    36
    
    
    
    (119
    )
    
    
    395Total operating revenues
    
    
    5,136
    
    
    
    2,157
    
    
    
    3,360
    
    
    
    836
    
    
    
    (233
    )
    
    
    11,256Claims, benefits and expenses:Net incurred
claims and benefits
    
    
    4,442
    
    
    
    1,648
    
    
    
    2,384
    
    
    
    1,814
    
    
    
    (115
    )
    
    
    10,173Policyholders dividends
    
    
    100
    
    
    
    3
    
    
    
    10
    
    
    
    1
    
    
    
    
    
    
    
    114Amortization of deferred acquisition costs
    
    
    1,195
    
    
    
    408
    
    
    
    224
    
    
    
    138
    
    
    
    
    
    
    
    1,965Other insurance related expenses
    
    
    741
    
    
    
    100
    
    
    
    530
    
    
    
    40
    
    
    
    
    
    
    
    1,411Other operating expenses
    
    
    197
    
    
    
    101
    
    
    
    66
    
    
    
    159
    
    
    
    (118
    )
    
    
    405Total claims, benefits and expenses
    
    
    6,675
    
    
    
    2,260
    
    
    
    3,214
    
    
    
    2,152
    
    
    
    (233
    )
    
    
    14,068Operating income (loss) from continuing
operations before income tax and minority
interest
    
    
    (1,539
    )
    
    
    (103
    )
    
    
    146
    
    
    
    (1,316
    )
    
    
    
    
    
    
    (2,812
    )Income tax (expense) benefit on operating income
    
    
    592
    
    
    
    59
    
    
    
    (33
    )
    
    
    470
    
    
    
    
    
    
    
    1,088Minority interest
    
    
    (4
    )
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Net operating income (loss) from continuing
operations
    
    
    (951
    )
    
    
    (34
    )
    
    
    113
    
    
    
    (846
    )
    
    
    
    
    
    
    (1,718
    )Realized investment gains (losses), net of
participating policyholders and minority
interests
    
    
    361
    
    
    
    114
    
    
    
    (141
    )
    
    
    126
    
    
    
    
    
    
    
    460Income tax (expense) benefit on realized
investment gains (losses)
    
    
    (127
    )
    
    
    (40
    )
    
    
    33
    
    
    
    (41
    )
    
    
    
    
    
    
    (175
    )Net income (loss)
    
    $
    (717
    )
    
    $
    40
    
    
    $
    5
    
    
    $
    (761
    )
    
    $
    
    
    
    $
    (1,433
    )Reinsurance receivables
    
    $
    5,508
    
    
    $
    1,497
    
    
    $
    2,999
    
    
    $
    6,250
    
    
    $
    
    
    
    $
    16,254Insurance receivables
    
    $
    2,264
    
    
    $
    320
    
    
    $
    282
    
    
    $
    216
    
    
    $
    
    
    
    $
    3,082Insurance reserves:Claim and claim adjustment expense
    
    $
    14,282
    
    
    $
    4,200
    
    
    $
    3,576
    
    
    $
    9,672
    
    
    $
    
    
    
    $
    31,730Unearned premiums
    
    
    2,267
    
    
    
    1,480
    
    
    
    153
    
    
    
    1,100
    
    
    
    
    
    
    
    5,000Future policy benefits
    
    
    
    
    
    
    
    
    
    
    8,161
    
    
    
    
    
    
    
    
    
    
    
    8,161Policyholders funds
    
    
    79
    
    
    
    3
    
    
    
    522
    
    
    
    (3
    )
    
    
    
    
    
    
    601Deferred acquisition costs
    
    $
    499
    
    
    $
    257
    
    
    $
    1,745
    
    
    $
    32
    
    
    $
    
    
    
    $
    2,533
 163




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##### Table of Contents



CorporateStandard
    
    Specialty
    
    Life and Group
    
    and Other
    
    Elimi-Year ended December 31, 2002(In millions)
    
    Lines
    
    Lines
    
    Non-Core
    
    Non-Core
    
    nations
    
    TotalNet earned premiums
    
    $
    4,678
    
    
    $
    1,451
    
    
    $
    3,408
    
    
    $
    714
    
    
    $
    (38
    )
    
    $
    10,213Net investment income
    
    
    475
    
    
    
    172
    
    
    
    821
    
    
    
    262
    
    
    
    
    
    
    
    1,730Other revenues
    
    
    355
    
    
    
    108
    
    
    
    199
    
    
    
    79
    
    
    
    (146
    )
    
    
    595Total operating revenues
    
    
    5,508
    
    
    
    1,731
    
    
    
    4,428
    
    
    
    1,055
    
    
    
    (184
    )
    
    
    12,538Claims, benefits and expenses:Net incurred claims and benefits
    
    
    3,418
    
    
    
    1,066
    
    
    
    3,210
    
    
    
    681
    
    
    
    (41
    )
    
    
    8,334Policyholders dividends
    
    
    73
    
    
    
    3
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    86Amortization of deferred acquisition costs
    
    
    1,125
    
    
    
    349
    
    
    
    162
    
    
    
    155
    
    
    
    
    
    
    
    1,791Other insurance related expenses
    
    
    354
    
    
    
    77
    
    
    
    630
    
    
    
    163
    
    
    
    (131
    )
    
    
    1,093Other operating expenses
    
    
    308
    
    
    
    94
    
    
    
    103
    
    
    
    185
    
    
    
    (12
    )
    
    
    678Total claims, benefits and expenses
    
    
    5,278
    
    
    
    1,589
    
    
    
    4,115
    
    
    
    1,184
    
    
    
    (184
    )
    
    
    11,982Restructuring and other related charges
    
    
    (8
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (27
    )
    
    
    
    
    
    
    (37
    )Operating income (loss) from continuing operations
before income tax and minority interest
    
    
    238
    
    
    
    143
    
    
    
    314
    
    
    
    (102
    )
    
    
    
    
    
    
    593Income tax (expense) benefit on operating income
    
    
    (56
    )
    
    
    (40
    )
    
    
    (108
    )
    
    
    33
    
    
    
    
    
    
    
    (171
    )Minority interest
    
    
    (13
    )
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )Net operating income (loss) from continuing
operations
    
    
    169
    
    
    
    90
    
    
    
    206
    
    
    
    (69
    )
    
    
    
    
    
    
    396Realized investment gains (losses), net of
participating policyholders and minority
interests
    
    
    (119
    )
    
    
    (39
    )
    
    
    (175
    )
    
    
    81
    
    
    
    
    
    
    
    (252
    )Income tax (expense) benefit on realized
investment gains (losses)
    
    
    40
    
    
    
    14
    
    
    
    60
    
    
    
    (11
    )
    
    
    
    
    
    
    103Loss from discontinued operations, net of tax of $9
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )Cumulative effect of a change in accounting
principle, net of tax of $7
    
    
    (43
    )
    
    
    (5
    )
    
    
    (8
    )
    
    
    (1
    )
    
    
    
    
    
    
    (57
    )Net income
    
    $
    47
    
    
    $
    60
    
    
    $
    48
    
    
    $
    
    
    
    $
    
    
    
    $
    155
 164




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The following table provides revenue by line of business for each reportable segment.
Revenues are comprised of operating revenues and realized investment gains and losses, net of
participating policyholders and minority interests. Revenue by Line of Business Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Standard LinesProperty
    
    $
    664
    
    
    $
    668
    
    
    $
    589Casualty
    
    
    4,195
    
    
    
    3,944
    
    
    
    4,049CNA Global
    
    
    901
    
    
    
    885
    
    
    
    751Standard Lines revenue
    
    
    5,760
    
    
    
    5,497
    
    
    
    5,389Specialty LinesProfessional Liability Insurance (CNA Pro)
    
    
    2,053
    
    
    
    1,612
    
    
    
    1,083Surety
    
    
    361
    
    
    
    346
    
    
    
    325Warranty
    
    
    314
    
    
    
    313
    
    
    
    284Specialty Lines revenue
    
    
    2,728
    
    
    
    2,271
    
    
    
    1,692Life and Group Non-CoreLife & Annuity
    
    
    (45
    )
    
    
    1,030
    
    
    
    911Health
    
    
    1,053
    
    
    
    2,026
    
    
    
    3,098Other
    
    
    81
    
    
    
    163
    
    
    
    244Life and Group Non-Core revenue
    
    
    1,089
    
    
    
    3,219
    
    
    
    4,253Corporate and Other Non-Core revenueCNA Re
    
    
    220
    
    
    
    688
    
    
    
    869Other
    
    
    253
    
    
    
    274
    
    
    
    267Corporate and Other Non-Core revenue
    
    
    473
    
    
    
    962
    
    
    
    1,136Intersegment eliminations
    
    
    (120
    )
    
    
    (233
    )
    
    
    (184
    )Total revenue
    
    $
    9,930
    
    
    $
    11,716
    
    
    $
    12,286
 Note O. Restructuring and Other Related Charges In 2001, the Company finalized and approved two separate restructuring plans. The first plan
related to the Companys Information Technology operations (the IT Plan). The remaining accrual of
$3 million was released during 2004. The second plan related to restructuring the property and
casualty segments and Life and Group Non-Core segment, discontinuation of the variable life and
annuity business and consolidation of real estate locations (the 2001 Plan). 2001 Plan The overall goal of the 2001 Plan was to create a simplified and leaner organization for customers
and business partners. The major components of the plan included a reduction in the number of
strategic business units (SBUs) in the property and casualty operations, changes in the strategic
focus of the Life and Group Non-Core segment (formerly Life Operations and Group Operations) and
consolidation of real estate locations. The reduction in the number of property and casualty SBUs
resulted in consolidation of SBU functions, including underwriting, claims, marketing and finance.
The strategic changes in Group Operations included a decision to discontinue the variable life and
annuity business. 165




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The following table summarizes the 2001 Plan accrual and the activity in that accrual since inception. 2001 Plan Accrual EmployeeTermination
    
    Lease
    
    Impairedand Related
    
    Termination
    
    Asset
    
    Other(In millions)
    
    Benefit Costs
    
    Costs
    
    Charges
    
    Costs
    
    Total2001 Plan Initial Accrual
    
    $
    68
    
    
    $
    56
    
    
    $
    30
    
    
    $
    35
    
    
    $
    189Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (35
    )Payments charged against liability
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Accrued costs December 31, 2001
    
    
    66
    
    
    
    56
    
    
    
    30
    
    
    
    
    
    
    
    152Costs that did not require cash
    
    
    (1
    )
    
    
    (3
    )
    
    
    (9
    )
    
    
    
    
    
    
    (13
    )Payments charged against liability
    
    
    (53
    )
    
    
    (12
    )
    
    
    (4
    )
    
    
    
    
    
    
    (69
    )Reduction of accrual
    
    
    (10
    )
    
    
    (7
    )
    
    
    (15
    )
    
    
    
    
    
    
    (32
    )Accrued costs December 31, 2002
    
    
    2
    
    
    
    34
    
    
    
    2
    
    
    
    
    
    
    
    38Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Payments charged against liability
    
    
    (2
    )
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )Accrued costs December 31, 2003
    
    
    
    
    
    
    19
    
    
    
    1
    
    
    
    
    
    
    
    20Payments charged against liability
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    (5
    )Accrued costs December 31, 2004
    
    $
    
    
    
    $
    14
    
    
    $
    1
    
    
    $
    
    
    
    $
    15
 During 2002, $32 million pretax, or $21 million after-tax, of this accrual was reduced. No
restructuring and other related charges related to the 2001 Plan were incurred in 2003 or 2004. Note P. Significant Transactions CNA Trust On August 1, 2004, the Company completed the sale of the retirement plan trust and recordkeeping
business portfolio of CNA Trust to Union Bank of California, N.A. (Union Bank) for approximately
$12 million. As a result of the sale, CNA recorded a realized investment gain of approximately $9
million pretax ($5 million after-tax) for the year ended December 31, 2004. Union Bank assumed assets and liabilities of $172 million and $172 million at August 1, 2004. The
assets and liabilities of CNA Trust were $216 million and $184 million at December 31, 2003. The
revenues of the business sold through the sale date were $11 million, $27 million and $28 million
for the years ended December 31, 2004, 2003 and 2002. Net results of operations of this business
through the sale date were a net loss of $2 million, and net income of $0 million and $2 million
for the years ended December 31, 2004, 2003 and 2002. On November 19, 2004, the charter of CNA Trust was sold to Nevada Security Bank for a nominal fee.
As part of the sale, CNA Trust was merged into Nevada Security Bank, and is no longer a subsidiary
of CNA. Individual Life Sale On April 30, 2004, the Company completed the sale of its individual life insurance business to
Swiss Re. The business sold included term, universal and permanent life insurance policies and
individual annuity products. CNAs individual long term care and structured settlement businesses
were excluded from the sale. Swiss Re acquired VFL and CNAs Nashville, Tennessee insurance
servicing and administration building as part of the sale. In connection with the sale, CNA
entered into a reinsurance agreement in which CAC ceded its individual life insurance business to
Swiss Re on a 100% indemnity reinsurance basis. Subject to certain exceptions, Swiss Re 166




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##### Table of Contents



assumed the credit risk of business that was previously reinsured to other carriers. As a result
of this reinsurance agreement with Swiss Re, approximately $1 billion of future policy benefit
reserves were ceded. CNA received consideration of approximately $700 million and recorded a
realized investment loss of $622 million pretax ($389 million after-tax). Swiss Re assumed assets and liabilities of $6.6 billion and $5.2 billion at April 30, 2004. The
assets and liabilities of the individual life business sold were $6.6 billion and $5.4 billion at
December 31, 2003. The revenues of the individual life business through the sale date were $151
million, $625 million and $652 million for the years ended December 31, 2004, 2003 and 2002. The
net results for this business through the sale date were a net loss of $6 million, and net income
of $43 million and $55 million for the years ended December 31, 2004, 2003 and 2002. Group Benefits Sale On December 31, 2003, the Company completed the sale of the majority of its Group Benefits business
through the sale of CNAGLA to Hartford Financial Services Group, Inc. (Hartford). The business
sold included group life and accident, short and long term disability and certain other products.
CNAs group long term care and specialty medical businesses were excluded from the sale. In
connection with the sale, CNA received consideration of approximately $530 million and recorded a
realized investment loss on the sale of $163 million pretax ($122 million after-tax), including an
after-tax realized investment gain of $8 million ($13 million pretax) recorded in the second
quarter of 2004. As a result of this agreement, Hartford assumed assets and liabilities of $2.4 billion and $1.6
billion at December 31, 2003. The assets and liabilities of the CNA Group Benefits business sold
were $2.2 billion and $1.6 billion at December 31, 2002. The revenues of the Group Benefits
business were $1,204 million and $1,137 million for the years ended December 31, 2003 and 2002.
Net income was $52 million and $38 million for the years ended December 31, 2003 and 2002. Assumed Reinsurance Renewal Rights Sale In October of 2003, the Company entered into an agreement to sell the renewal rights for most of
the treaty business of CNA Re to Folksamerica Reinsurance Company (Folksamerica). Under the terms
of the transaction, Folksamerica will compensate CNA based upon the amount of premiums renewed by
Folksamerica over the next two contract renewals. The renewal rights transaction did not have a
material effect on results of operations. Concurrent with the sale, CNA withdrew from the assumed
reinsurance business (the CNA Re segment) and is managing the run-off of its retained liabilities. National Postal Mail Handlers Union Contract Termination In 2002, the Company sold Claims Administration Corporation and transferred the National Postal
Handlers Union group benefits plan (the Mail Handlers Plan) to First Health Group Corporation. As
a result of this transaction, the Company recognized a $7 million pretax realized loss on the sale
of Claims Administration Corporation and $15 million of pretax non-recurring fee income, related to
the transfer of the Mail Handlers Plan. The revenues of Claims Administration Corporation and the
Mail Handlers Plan were $1,151 million for the year ended December 31, 2002. Net income from
Claims Administration Corporation and Mail Handlers Plan was $5 million, including the
non-recurring fee income for the year ended December 31, 2002. CNA Re U.K. and Other Dispositions of Certain Businesses On October 31, 2002, the Company completed the sale of CNA Re U.K. to Tawa UK Limited (Tawa), a
subsidiary of Artemis Group, a diversified French-based holding company. The sale includes
business underwritten since inception by CNA Re U.K., except for certain risks retained by CCC as
discussed below. 167




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The purchase price was $1, subject to adjustments based primarily upon the results of operations
and realized foreign currency losses of CNA Re U.K. The purchase price adjustment recorded in 2003
related to foreign currency losses and resulted in CNA contributing additional capital to CNA Re
U.K. of $11 million. Also in 2003, the Company finalized its impairment analysis based upon the
terms of the completed transactions and reduced a previously recorded impairment loss by
approximately $39 million after-tax. The reduction of the impairment was included in net realized
investment gains. Under the terms of the purchase price adjustment, CCC was entitled to receive $5 million from Tawa
after Tawa was able to legally withdraw funds from the former CNA Re U.K. entities; at December 31,
2004, CCC had received all amounts owed to it, totaling approximately $5 million. CNA has also
committed to contribute up to $5 million to the former CNA Re U.K. entities over a four-year period
beginning in 2010 should the Financial Services Authority (FSA) deem those entities to be
undercapitalized. Concurrent with the sale, several reinsurance agreements under which CCC had provided
retrocessional protection to CNA Re U.K. were terminated. As part of the sale, CNA Re U.K.s net
exposure to all IGI Program liabilities was assumed by CCC. Further, CCC provided a $100 million
stop loss cover attaching at carried reserves on CNA Re U.K.s 2001 underwriting year exposures for
which CCC received premiums of $25 million. Personal Insurance Transaction As part of the sale of CNAs personal insurance business to The Allstate Corporation on October 1,
1999, the Company shared in payments of claim and allocated claim adjustment expenses related to
losses incurred prior to October 1, 1999 on the CNA policies transferred to Allstate when they
exceeded the claim and allocated claim adjustment expense reserves of approximately $1 billion at
the date of sale. The Companys remaining obligation with respect to claim and allocated claim
adjustment expense reserves, valued as of October 1, 2003, was settled in March of 2004 and the
sharing agreement was terminated. This settlement did not have a material impact on the 2004
results of operations of the Company. Note Q. Discontinued Operations CNA reports net assets of discontinued operations, which primarily consist of run-off operations
discontinued in the mid-1990s, in other assets on the Consolidated Balance Sheets. The following
table provides more detailed information regarding those net assets. Discontinued Operations December 31
(In millions)
    
    2004
    
    2003Total investments
    
    $
    410
    
    
    $
    458Other assets
    
    
    345
    
    
    
    358Insurance reserves
    
    
    (439
    )
    
    
    (480
    )Other liabilities
    
    
    (16
    )
    
    
    (28
    )Net assets of discontinued operations
    
    $
    300
    
    
    $
    308
 CNA Vida Disposition In the first quarter of 2002, the Company completed the sale of the common stock of CNA Holdings
Limited and its subsidiaries (CNA Vida), CNAs life operations in Chile, to Consorcio Financiero
S.A. (Consorcio). In connection with the sale, CNA received proceeds of $73 million and recorded
an after-tax loss from discontinued operations of $35 million. This loss is composed of $37
million, net of tax, realized loss on the sale of CNA Vida and income of $2 million, net of tax,
from CNA Vidas operations for 2002. CNA Vidas results of operations, including the loss on sale,
are presented as discontinued operations for the year ended 2002 in the Consolidated Statements of
Operations. 168




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Note R. Quarterly Financial Data (Unaudited) The following tables set forth unaudited quarterly financial data for the years ended December 31, 2004 and 2003. Quarterly Financial Data Full(In millions, except per share data)
    
    First
    
    Second
    
    Third
    
    Fourth
    
    Year2004Revenues
    
    $
    2,265
    
    
    $
    2,663
    
    
    $
    2,317
    
    
    $
    2,685
    
    
    $
    9,930Income (loss) from continuing
operations before income tax
    
    $
    (179
    )
    
    $
    318
    
    
    $
    (80
    )
    
    $
    411
    
    
    $
    470Income tax (expense) benefit
    
    
    54
    
    
    
    (29
    )
    
    
    52
    
    
    
    (106
    )
    
    
    (29
    )Net income (loss)
    
    $
    (125
    )
    
    $
    289
    
    
    $
    (28
    )
    
    $
    305
    
    
    $
    441Basic and diluted earnings (loss)
per share available to common
stockholders
    
    $
    (0.55
    )
    
    $
    1.07
    
    
    $
    (0.17
    )
    
    $
    1.12
    
    
    $
    1.472003Revenues
    
    $
    2,845
    
    
    $
    3,099
    
    
    $
    2,725
    
    
    $
    3,047
    
    
    $
    11,716Income (loss) from continuing
operations before income tax
    
    $
    101
    
    
    $
    75
    
    
    $
    (2,766
    )
    
    $
    244
    
    
    $
    (2,346
    )Income tax (expense) benefit
    
    
    (18
    )
    
    
    (5
    )
    
    
    1,006
    
    
    
    (70
    )
    
    
    913Net income (loss)
    
    $
    83
    
    
    $
    70
    
    
    $
    (1,760
    )
    
    $
    174
    
    
    $
    (1,433
    )Basic and diluted earnings (loss)
per share available to common
stockholders
    
    $
    0.30
    
    
    $
    0.25
    
    
    $
    (7.94
    )
    
    $
    0.67
    
    
    $
    (6.58
    )
 Note S. Related Party Transactions CNA reimburses Loews, or pays directly, for management fees, travel and related expenses and
expenses of investment facilities and services provided to CNA. The amounts reimbursed or paid by
CNA were approximately $21 million, $21 million and $19 million for the years ended December 31,
2004, 2003 and 2002. In addition, CNAF and its eligible subsidiaries are included in the
consolidated federal income tax return of Loews and its eligible subsidiaries. See Note E for a
detailed description of the income tax agreement and tax payments made between the Company and
Loews. Also, CNA writes, at standard rates, a limited amount of insurance for Loews and its
affiliates. The total premiums from Loews for the year ended December 31, 2004 were not
significant. The total premium from Loews and its affiliates was $4 million for each of the years
ended December 31, 2003 and 2002. CNA previously sponsored a stock ownership plan whereby the Company financed the purchase of
Company common stock by certain officers, including executive officers. Interest charged on the
principal amount of these outstanding stock purchase loans is generally equivalent to the long term
applicable federal rate, compounded semi-annually, in effect on the disbursement date of the loan.
Loans made pursuant to the plan are generally full recourse with a ten-year term and are secured by
the stock purchased. The balance of the loans as of December 31, 2004 exceeds the fair value of
the related common stock collateral by $35 million. CNA Surety has provided significant surety bond protection for a large national contractor that
undertakes projects for the construction of government and private facilities, a substantial
portion of which have been reinsured by CCC. In order to help this contractor meet its liquidity
needs and complete projects which had been bonded by CNA Surety, commencing in 2003 CNAF has
provided loans to the contractor through a credit facility. In December of 2004, the credit
facility was amended to increase the maximum available loans to $106 million from $86 million. The
amendment also provides that CNAF may in its sole discretion further increase the amounts available
for loans under the credit facility, up to an aggregate maximum of $126 million. As of December
31, 2004 and 2003, there were $99 169




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million and $80 million of total debt outstanding under the credit facility. Additional loans in January and
February of 2005 brought the total debt outstanding under the credit facility, less accrued interest, to $104 million as of February 24,
2005. Loews, through a participation agreement with CNAF, provided funds for and owned a
participation of $29 million and $25 million of the loans outstanding as of December 31, 2004 and
2003 and has agreed to participation of one-third of any additional loans which may be made above
the original $86 million credit facility limit up to the $126 million maximum available line. In connection with the amendment to increase the maximum available line under the credit facility
in December of 2004, the term of the loan under the credit facility was extended to mature in March
of 2009 and the interest rate was reduced prospectively from 6% over prime rate to 5% per annum,
effective as of December 27, 2004, with an additional 3% interest accrual when borrowings under the
facility are at or below the original $86 million limit. Loans under the credit facility are secured by a pledge of substantially all of the assets of the
contractor and certain of its affiliates. In connection with the credit facility, CNAF has also
guaranteed or provided collateral for letters of credit which are charged against the maximum
available line and, if drawn upon, would be treated as loans under the credit facility. As of
December 31, 2004 and 2003, these guarantees and collateral obligations aggregated $13 million and
$7 million. As of December 31, 2004, the aggregate amount of outstanding principal and accrued interest under
the credit facility was $70 million, net of participation by Loews in the amount of $29 million. The contractor implemented a restructuring plan intended to reduce costs and improve cash flow, and
appointed a chief restructuring officer to manage execution of the plan. In the course of
addressing various expense, operational and strategic issues, however, the contractor has decided
to substantially reduce the scope of its original business and to concentrate on those segments
determined to be potentially profitable. As a consequence, operating cash flow, and in turn the
capacity to service debt, has been reduced below previous levels. Restructuring plans have also
been extended to accommodate these circumstances. In light of these developments, CNA has taken an
impairment charge of $56 million pretax for the fourth quarter of 2004, net
of the participation by Loews, with respect to amounts loaned under the facility. Any draws under
the credit facility beyond $106 million or further changes in the national contractors business
plan or projections may necessitate further impairment charges. As a result of the impairment taken in the fourth quarter of 2004, CNAF plans to recognize income using the effective
interest rate method starting in the first quarter of
2005. Under this method, interest income recognized will be accrued on the net carrying amount of the loan at the effective interest
rate used to discount the impaired loans estimated future cash flows. The excess of the cash
received over the interest income recognized will reduce the carrying amount of the loan. The change in present value, if any, of the loan
that is attributable to changes in the amount or timing of future cash flows will be recorded similar to the impairment charges previously recorded. CNA Surety has advised that it intends to continue to provide surety bonds on behalf of the
contractor during this extended restructuring period, subject to the contractors initial and
ongoing compliance with CNA Suretys underwriting standards and ongoing management of CNA Suretys
exposure to the contractor. All bonds written for the national contractor are issued by CCC and its
affiliates, other than CNA Surety, and are subject to underlying reinsurance treaties pursuant to which all bonds
on behalf of CNA Surety are 100% reinsured to one of CNA Suretys insurance subsidiaries. This
arrangement underlies the more limited reinsurance coverages discussed below. Through facultative reinsurance contracts with CCC, CNA Suretys exposure on bonds written from
October 1, 2002 through October 31, 2003 has been limited to $20 million per bond, with CCC to
incur 100% of losses above that level. For bonds written on or subsequent to November 1, 2003, CNA
Suretys exposure is limited to $14.5 million per bond, subject to a per principal retention of $60
million and an aggregate limit of $150 million, under all facultative insurance coverage and two
excess of loss treaties between CNA Surety and CCC. The first excess of loss contract, $40 million
excess of $60 million, provides CNA Surety coverage exclusively for the national contractor, while
the second excess of loss contract, $50 million excess of $100 million, provides CNA Surety with
coverage for the national contractor as well as other CNA Surety risks. For bonds written prior to
September 30, 2002 there is no facultative reinsurance and CCC retains 100% of the losses above the
per principal retention of $60 million. 170




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##### Table of Contents



Renewals of both excess of loss contracts were effective January 1, 2005. CCC and CNA Surety are
presently discussing a possible restructuring of the reinsurance arrangements discussed in the
paragraph above, under which all bonds written for the national contractor would be reinsured by
CCC under an excess of $60 million treaty and other CNA Surety accounts would be covered by a
separate $50 million excess of $100 million treaty. CCC and CNA Surety continue to engage in periodic discussions with insurance regulatory authorities
regarding the level of bonds provided for this principal and will continue to apprise those
authorities regarding their ongoing exposure to this account. Indemnification and subrogation rights, including rights to contract proceeds on construction
projects in the event of default, exist that reduce CNA Suretys and ultimately the Companys
exposure to loss. While CNAF believes that the contractors continuing restructuring efforts may be
successful and provide sufficient cash flow for its operations, the contractors failure to
ultimately achieve its extended restructuring plan or perform its contractual obligations under the
credit facility or under the Companys surety bonds could have a material adverse effect on the
Companys results of operations and/ or equity. If such failures occur, the Company estimates the
surety loss, net of indemnification and subrogation recoveries, but before the effects of minority
interest, to be approximately $200 million pretax. In addition, such failures could cause the
remaining unimpaired amount due under the credit facility to be uncollectible. CNA Surety Corporation CCC provided an excess of loss reinsurance contract to the insurance subsidiaries of CNA Surety
over a period that expired on December 31, 2000 (the stop loss contract). The stop loss contract
limits the net loss ratios for CNA Surety with respect to certain accounts and lines of insurance
business. In the event that CNA Suretys accident year net loss ratio exceeds 24% for 1997 through
2000 (the contractual loss ratio), the stop loss contract requires CCC to pay amounts equal to the
amount, if any, by which CNA Suretys actual accident year net loss ratio exceeds the contractual
loss ratio multiplied by the applicable net earned premiums. The minority shareholders of CNA
Surety do not share in any losses that apply to this contract. There were no reinsurance balances
payable under this stop loss contract as of December 31, 2004 and 2003. Effective October 1, 2002, CCC provided an excess of loss protection for new and renewal bonds for
CNA Surety for each principal exposure that exceeds $60 million since October 1, 2002 in two parts
 a) $40 million excess of $60 million and b) $50 million excess of $100 million for CNA Surety.
Effective January 1, 2004, this contract was commuted and CCC paid CNA Surety $11 million in return
premium in the first quarter of 2004 based on experience under the contract. Effective October 1,
2003, CCC entered into a $3 million excess of $12 million excess of loss contract with CNA Surety.
The reinsurance premium for the coverage provided by the $3 million excess of $12 million contract
was $0.3 million plus, if applicable, additional premiums based on paid losses. The contract
provided for aggregate coverage of $12 million. This contract expired on December 31, 2004.
Effective January 1, 2004, the Company obtained replacement coverage from third party reinsurers as
part of the 2004 Excess of Loss Treaty. 171




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
CNA Financial Corporation
Chicago, Illinois We have audited the accompanying consolidated balance sheets of CNA Financial Corporation (an
affiliate of Loews Corporation) and subsidiaries (the Company) as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders equity, and cash flows for
each of the three years in the period ended December 31, 2004. Our audits also included the
financial statement schedules listed in the Index at Item 15. These financial statements and
financial statement schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion on the financial statements and financial statement
schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of CNA Financial Corporation and subsidiaries as of December 31, 2004 and
2003, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2004, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2004, based on the criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 25, 2005 expressed an unqualified opinion on managements assessment of the effectiveness
of the Companys internal control over financial reporting and an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting. As discussed in Note A to the consolidated financial statements, the Company changed its method of
accounting for certain separate account products in 2004. Deloitte & Touche LLP Chicago, ILFebruary 25, 2005 172




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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of CNA Financial Corporation (CNAF) and its subsidiaries is responsible for establishing and maintaining
adequate internal control over financial reporting. CNAFs internal control system was designed to
provide reasonable assurance to the Companys management, its Audit Committee and Board of
Directors regarding the preparation and fair presentation of published financial statements. There are inherent limitations to the effectiveness of any internal control or system of control,
however well designed, including the possibility of human error and the possible circumvention or
overriding of such controls or systems. Moreover, because of changing conditions the reliability
of internal controls may vary over time. As a result even effective internal controls can provide
no more than reasonable assurance with respect to the accuracy and completeness of financial
statements and their process of preparation. CNAF management assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2004. In making this assessment, it used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control 
Integrated Framework. Based on our assessment we believe that, as of December 31, 2004, the
Companys internal control over financial reporting is effective based on those criteria. CNAFs independent registered public accountant, Deloitte & Touche LLP, has issued an audit report covering
our assessment of the Companys internal control over financial reporting. This report appears on
page 174. CNA Financial Corporation
Chicago, Illinois
February 25, 2005 173




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders ofCNA Financial CorporationChicago, Illinois We have audited managements assessment, included in the accompanying Managements Report on Internal Control
Over Financial Reporting, that CNA Financial Corporation (an affiliate of Loews Corporation) and subsidiaries (the Company) maintained effective
internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions. A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys
principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness
of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also
in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated
financial statements and financial statement schedules as of and for the year ended December 31, 2004 of the Company and
our report dated February 25, 2005 expressed an unqualified opinion
on those consolidated financial statements and financial statement schedules and included an explanatory paragraph regarding the
change in the method of accounting for certain separate account products in
2004. Deloitte & Touche LLP
Chicago, IL
February 25, 2005 174




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES As of December 31, 2004, the Companys management, including the Companys Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), have conducted an evaluation of the effectiveness of its
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on that evaluation,
the CEO and CFO concluded that the Companys disclosure controls and procedures are effective in
ensuring that all material information required to be filed in this annual report has been made
known to them in a timely manner. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company included a report of
managements assessment of the design and effectiveness of its internal controls as part of this
Annual Report on Form 10-K for the fiscal year ended December 31, 2004. The independent registered
public accounting firm of the Company also attested to, and reported on, managements assessment of
the effectiveness of internal control over financial reporting. Managements report and the
independent registered public accounting firms attestation report are included in the Companys
2004 Financial Statements under the captions entitled Managements Report on Internal Control Over
Financial Reporting and Report of Independent Registered Public Accounting Firm and are incorporated herein by reference. There has been no change in the Companys internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2004
that has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 
 ITEM 9B. OTHER INFORMATION None. 175




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS OF THE REGISTRANT FIRST BECAMEPOSITION AND OFFICES
    
    
    
    
    
    EXECUTIVE OFFICERNAME
    
    HELD WITH REGISTRANT
    
    AGE
    
    OF CNA
    
    PRINCIPAL OCCUPATION DURING PAST FIVE YEARSStephen W. Lilienthal
    
    Chief Executive
Officer, CNA
Financial
Corporation
    
    
    54
    
    
    
    2001
    
    
    Chief Executive Officer of CNA Financial
Corporation and subsidiaries since August,
2002. Prior to that, President and Chief
Executive Officer, Property and Casualty
Operations of the CNA insurance companies
since July 2001. From June 1993 to June
1998, senior officer of USF&G Corporation
(USF&G). In April 1998, USF&G was
acquired by the St. Paul Companies. Mr.
Lilienthal was Executive Vice President of
the St. Paul Companies until July 2001.Michael Fusco
    
    Executive Vice
President, Chief
Actuary, CNA
insurance companies
    
    
    56
    
    
    
    2004
    
    
    Executive Vice President, Chief Actuary of
the CNA insurance companies since March,
2002. Prior to that time, he was Senior
Vice President of the CNA insurance
companies since November, 2000. From 1988
until November of 2000, Mr. Fusco held
various positions at Insurance Services
Offices, including Executive Vice
President.Jonathan D. Kantor
    
    Executive Vice
President, General
Counsel and
Secretary
    
    
    49
    
    
    
    1997
    
    
    Executive Vice President, General Counsel
and Secretary of CNA Financial Corporation
since March, 1998. Executive Vice
President, General Counsel and Secretary
of the CNA insurance companies since
April, 1997 to current date.James R. Lewis
    
    President and Chief
Executive Officer,
Property and
Casualty
Operations, CNA
insurance companies
    
    
    55
    
    
    
    2002
    
    
    President and Chief Executive Officer,
Property and Casualty Operations of the
CNA insurance companies since August,
2002. From August 2001 to August 2002,
Executive Vice President, U.S. Insurance
Operations, Property and Casualty
Operations of the CNA insurance companies.
From November 1992 to August 2001, Senior
Vice President of USF&G Corporation.D. Craig Mense
    
    Executive Vice
President & Chief
Financial Officer
    
    
    53
    
    
    
    2004
    
    
    Executive Vice President and Chief
Financial Officer since November, 2004.
Prior to that, he served as President and
Chief Executive Officer of Global Run-Off
Operations at St. Paul Travelers. From
May, 2003 to May, 2004, he was Chief
Operating Officer of the Gulf Insurance
Group at Travelers Property Casualty Corp.
Previously, at Travelers Property
Casualty Corp., Mr. Mense was Senior Vice
President and Chief Financial Officer
(Bond) from April, 1996 to July, 2002, and
Chief Financial and Administrative Officer
(Personal Lines) from July, 2002 to March,
2003.
 Officers are elected and hold office until their successors are elected and qualified, and are
subject to removal by the Board of Directors. Additional information required in Item 10, Part III has been omitted as the Registrant
intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and
Exchange Commission not later than 120 days after the close of its fiscal year. 
 ITEM 11. EXECUTIVE COMPENSATION Information required in Item 11, Part III has been omitted as the Registrant intends to file a
definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission
not later than 120 days after the close of its fiscal year. 176




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Equity Compensation Plan The table below provides the securities authorized for issuance under equity compensation plans. Executive Compensation Information Number of securitiesNumber of securities to
    
    
    
    
    
    remaining available forbe issued upon
    
    Weighted-average exercise
    
    future issuance underexercise of outstanding
    
    price of outstanding
    
    equity compensation plansoptions, warrants and
    
    options, warrants and
    
    (excluding securitiesrights
    
    rights
    
    reflected in column (a))December 31, 2004
    
    (a)
    
    (b)
    
    (c)Plan CategoryEquity compensation plans approved by
security holders
    
    
    1,474,000
    
    
    $
    29.17
    
    
    
    511,175Equity compensation plans not
approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,474,000
    
    
    $
    29.17
    
    
    
    511,175
 Additional Information required in Item 12, Part III has been omitted as the Registrant
intends to file a definitive proxy statement pursuant to Regulation 14A with the Securities and
Exchange Commission not later than 120 days after the close of its fiscal year. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required in Item 13, Part III has been omitted as the Registrant intends to file a
definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission
not later than 120 days after the close of its fiscal year. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information required in Item 14, Part III has been omitted as the Registrant intends to file a definitive proxy statement pursuant
to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the
close of its fiscal year. 177




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PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PageNumber(a)
    
    1.
    
    FINANCIAL STATEMENTS:Statements of Operations  Years Ended   December 31, 2004, 2003 and 2002
    
    
    94Balance Sheets  December 31, 2004 and 2003
    
    
    95Statements of Cash Flows  Years Ended December 31, 2004, 2003 and 2002
    
    
    97Statements of Stockholders Equity  Years Ended December 31, 2004, 2003 and 2002
    
    
    99Notes to Condensed Financial Statements
    
    
    100Report of Independent Registered Public Accounting Firm
    
    
    172(a)
    
    2.
    
    FINANCIAL STATEMENT SCHEDULES:Schedule I Summary of Investments
    
    
    181Schedule II Condensed Financial Information of Registrant (Parent Company)
    
    
    182Schedule III Supplementary Insurance Information
    
    
    190Schedule IV Reinsurance
    
    
    191Schedule V Valuation and Qualifying Accounts
    
    
    191Schedule VI Supplemental Information Concerning Property and Casualty Insurance Operations
    
    
    191(a)
    
    3.
    
    EXHIBITS:
 ExhibitDescription of Exhibit
    
    Number(3)
    
    Articles of Incorporation and by-laws:Certificate of Incorporation of CNA Financial Corporation, as amended May 20, 1999
(Exhibit 3.1 to 1999 Form 10-K incorporated herein by reference.)
    
    
    3.1By-Laws of CNA Financial Corporation, as amended April 28, 2004
    
    
    3.2(4)
    
    Instruments defining the rights of security holders, including indentures:CNA Financial Corporation hereby agrees to furnish to the Commission upon request copies of instruments with
respect to long term debt, pursuant to Item 601(b) (4) (iii) of Regulation S-K
    
    
    4.1(10)
    
    Material contracts:Federal Income Tax Allocation Agreement, dated February 29, 1980 between
CNA Financial Corporation and Loews Corporation (Exhibit 10.2 to 1987 Form
10-K incorporated herein by reference.)
    
    
    10.1CNA Employees Supplemental Savings Plan, as amended through January 1,
1994 (Exhibit 10.3 to 1999 Form 10-K incorporated herein by reference.)
    
    
    10.2
 178




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##### Table of Contents



ExhibitDescription of Exhibit
    
    NumberCNA Employees Retirement Benefit Equalization Plan, as amended through
January 1, 1994 (Exhibit 10.4 to 1999 Form 10-K incorporated herein by
reference)
    
    
    10.3Continental Casualty Company CNA Annual Incentive Bonus Plan Provisions
(Exhibit 10.1 to 1994 Form 10-K incorporated herein by reference)
    
    
    10.4CNA Financial Corporation 2000 Long Term Incentive Plan, dated August 4,
1999 (Exhibit 4.1 to 1999 Form S-8 filed August 4, 1999, incorporated
herein by reference)
    
    
    10.5Employment Agreement between CNA Financial Corporation and Robert V.
Deutsch, dated August 16, 1999 (Exhibit 10 to September 30, 1999 Form 10-Q
incorporated herein by reference)
    
    
    10.6Share Purchase Agreement between CNA and TAWA UK Limited,
dated July 15, 2002 for the entire issued share capital of CNA Re
Management Company Limited (Exhibit 2.1 to September 30, 2002
Form 10-Q incorporated herein by reference)
    
    
    10.7Employment Agreement between CNA Financial Corporation
and Stephen W. Lilienthal, dated July 25, 2002 (Exhibit 10.10 to
December 31, 2002 Form 10-K incorporated herein by reference)
    
    
    10.8Employment Agreement between CNA Financial Corporation
and James R. Lewis, dated August 9, 2002 (Exhibit 10.11 to
December 31, 2002 Form 10-K incorporated herein by reference)
    
    
    10.9Continuing Services Agreement between CNA Financial Corporation and
Bernard Hengesbaugh, dated August 26, 2002 (Exhibit 10.12 to
December 31, 2002 Form 10-K incorporated herein by reference)
    
    
    10.10(10)
    
    Material contracts (continued):Amendment to Employment Agreement between CNA Financial Corporation
and Robert V. Deutsch, dated February 25, 2003 (Exhibit 10.13 to December
31, 2002 Form 10-K incorporated herein by reference)
    
    
    10.11Employment Agreement between CNA Financial Corporation
and Jonathan D. Kantor, dated March 20, 2003 (Exhibit 10.14 to March 31,
2003 Form 10-Q incorporated herein by reference)
    
    
    10.12Capital Support Agreement among CNA Financial Corporation, Loews
Corporation and Continental Casualty Company, dated November 12,
2003 (Exhibit 10.15 to December 31, 2003 Form 10-K
incorporated herein by reference)
    
    
    10.13
 179




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##### Table of Contents



ExhibitDescription of Exhibit
    
    NumberEmployment Agreement between CNA Financial Corporation
and D. Craig Mense, dated December 2, 2004 (Exhibit 99.1 to December 8,
2004 Form 8-K incorporated herein by reference)
    
    
    10.14Amendment to Employment Agreement between CNA Financial Corporation
and D. Craig Mense, dated December 2, 2004 (Exhibit 99.2 to December 8,
2004 Form 8-K incorporated herein by reference)
    
    
    10.15Employment Agreement between CNA Financial Corporation
and Michael Fusco, dated August 18, 2004
    
    
    10.16CNA Supplemental Executive Savings and Capital Accumulation Plan, dated
July 1, 2003
    
    
    10.17First Amendment to the CNA Supplemental Executive Savings and Capital
Accumulation Plan, dated March 23, 2004
    
    
    10.18Second Amendment to the CNA Supplemental Executive Savings and Capital
Accumulation Plan, dated March 23, 2004
    
    
    10.19CNA Financial Board of Directors Term Sheet  Director and Committee Member
Fee Schedule - 2004 Annual Retainers
    
    
    10.20(21)
    
    Primary Subsidiaries of CNAF
    
    
    21.1(23)
    
    Consent of Independent Registered Public Accounting Firm
    
    
    23.1Exhibits:(c)
    
    
    
    None.Condensed Financial Information of Unconsolidated Subsidiaries:(d)
    
    
    
    None.
 The above exhibits are not included in this Form 10-K, but are
on file with the Securities and Exchange Commission. 180




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SCHEDULE I. SUMMARY OF INVESTMENTS  OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2004Cost or
    
    EstimatedAmortized
    
    Fair
    
    Carrying(In
millions)
    
    Cost
    
    Value
    
    ValueFixed maturity securities available-for-sale:Bonds:United States Government and government agencies and authorities  taxable
    
    $
    4,623
    
    
    $
    4,742
    
    
    $
    4,742States, municipalities and political subdivisions  tax exempt
    
    
    8,699
    
    
    
    8,857
    
    
    
    8,857Foreign governments and political subdivisions
    
    
    1,957
    
    
    
    2,095
    
    
    
    2,095Public utilities
    
    
    856
    
    
    
    998
    
    
    
    998All other corporate bonds
    
    
    13,599
    
    
    
    14,099
    
    
    
    14,099Redeemable preferred stocks
    
    
    142
    
    
    
    146
    
    
    
    146Total fixed maturity securities available-for-sale
    
    
    29,876
    
    
    
    30,937
    
    
    
    30,937Fixed maturity securities trading:Bonds:United States Government and government agencies and authorities  taxable
    
    
    27
    
    
    
    27
    
    
    
    27Foreign governments and political subdivisions
    
    
    32
    
    
    
    32
    
    
    
    32Public utilities
    
    
    3
    
    
    
    3
    
    
    
    3All other corporate bonds
    
    
    324
    
    
    
    324
    
    
    
    324Redeemable preferred stocks
    
    
    4
    
    
    
    4
    
    
    
    4Total fixed maturity securities trading
    
    
    390
    
    
    
    390
    
    
    
    390Equity securities available-for-sale:Common stocks:Banks, trusts and insurance companies
    
    
    3
    
    
    
    5
    
    
    
    5Industrial and other
    
    
    145
    
    
    
    255
    
    
    
    255Non-redeemable preferred stocks
    
    
    126
    
    
    
    150
    
    
    
    150Total equity securities available-for-sale
    
    
    274
    
    
    
    410
    
    
    
    410Equity securities trading:Common stocks:Industrial and other
    
    
    38
    
    
    
    38
    
    
    
    38Non-redeemable preferred stocks
    
    
    8
    
    
    
    8
    
    
    
    8Total equity securities trading
    
    
    46
    
    
    $
    46
    
    
    
    46Limited partnership investments
    
    
    1,549
    
    
    
    
    
    
    
    1,549Other invested assets
    
    
    57
    
    
    
    
    
    
    
    36Short term investments available-for-sale
    
    
    5,403
    
    
    
    
    
    
    
    5,404Short term investments trading
    
    
    459
    
    
    
    
    
    
    
    459Total investments
    
    $
    38,054
    
    
    
    
    
    
    $
    39,231
 181




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##### Table of Contents



SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) CNA Financial Corporation
Statements of Operations Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Revenues:Net investment income
    
    $
    14
    
    
    $
    16
    
    
    $
    8Realized investment gains (losses)
    
    
    (62
    )
    
    
    (3
    )
    
    
    3Other income
    
    
    5
    
    
    
    12
    
    
    
    13Total revenues
    
    
    (43
    )
    
    
    25
    
    
    
    24Expenses:Administrative and general
    
    
    5
    
    
    
    7
    
    
    
    3Interest
    
    
    104
    
    
    
    120
    
    
    
    131Total expenses
    
    
    109
    
    
    
    127
    
    
    
    134Loss from operations before income taxes, equity in net income
of subsidiaries and the cumulative effects of changes in
accounting principles
    
    
    (152
    )
    
    
    (102
    )
    
    
    (110
    )Income tax benefit
    
    
    53
    
    
    
    36
    
    
    
    39Loss before equity in net income of subsidiaries and the
cumulative effects of changes in accounting principles
    
    
    (99
    )
    
    
    (66
    )
    
    
    (71
    )Equity in net income (loss) of subsidiaries
    
    
    540
    
    
    
    (1,367
    )
    
    
    227Cumulative effect of changes in accounting principles, net of tax
    
    
    
    
    
    
    
    
    
    
    (1
    )Net income (loss)
    
    $
    441
    
    
    $
    (1,433
    )
    
    $
    155
 See accompanying Notes to Condensed Financial Information. 182




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CNA Financial Corporation
Balance Sheets December 31(In millions)
    
    2004
    
    2003Assets:Investment in subsidiaries
    
    $
    10,446
    
    
    $
    10,509Fixed maturity securities available-for-sale, at fair value, (amortized
cost of $23 and $131)
    
    
    23
    
    
    
    131Equity securities available-for-sale, at fair value, (cost of $1 and $1)
    
    
    1
    
    
    
    1Other invested assets
    
    
    (1
    )
    
    
    (1
    )Short term investments, at fair value which approximates cost
    
    
    749
    
    
    
    37Receivables for securities sold
    
    
    3
    
    
    
    1Amounts due from affiliates
    
    
    70
    
    
    
    18Other
    
    
    
    
    
    
    1Total assets
    
    $
    11,291
    
    
    $
    10,697Liabilities and Stockholders Equity:Liabilities:Short term debt
    
    
    493
    
    
    
    250Long term debt
    
    
    1,536
    
    
    
    1,482Other
    
    
    55
    
    
    
    13Total Liabilities
    
    
    2,084
    
    
    
    1,745Stockholders equity:Preferred stock (12,500,000 shares authorized)Series H Issue (no par value; $100,000 stated value; 7,500 shares
issued; held by Loews Corporation)
    
    
    750
    
    
    
    750Series I Issue (no par value; $23,200 stated value; 32,327 shares
issued; held by Loews Corporation)
    
    
    
    
    
    
    750Common stock ($2.50 par value; 500,000,000 shares authorized;
258,177,285 shares and 225,850,270 issued; and 255,953,958 and
223,617,337 shares outstanding)
    
    
    645
    
    
    
    565Additional paid-in capital
    
    
    1,701
    
    
    
    1,031Retained earnings
    
    
    5,601
    
    
    
    5,160Accumulated other comprehensive income
    
    
    650
    
    
    
    841Treasury stock (2,223,327 and 2,232,933 shares), at cost
    
    
    (69
    )
    
    
    (69
    )9,278
    
    
    
    9,028Notes receivable for the issuance of common stock
    
    
    (71
    )
    
    
    (76
    )Total stockholders equity
    
    
    9,207
    
    
    
    8,952Total liabilities and stockholders equity
    
    $
    11,291
    
    
    $
    10,697
 See accompanying Notes to Condensed Financial Information. 183




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CNA Financial Corporation
Statements of Cash Flows Years ended December 31(In millions)
    
    2004
    
    2003
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    441
    
    
    $
    (1,433
    )
    
    $
    155Adjustments to reconcile net income (loss) to net cash flows from
operating activities:Loss (income) of subsidiaries
    
    
    (540
    )
    
    
    1,367
    
    
    
    (227
    )Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    1Dividends received from subsidiaries
    
    
    307
    
    
    
    93
    
    
    
    118Realized (gains) losses
    
    
    62
    
    
    
    3
    
    
    
    (3
    )Changes in:Federal income taxes recoverable (amounts due to/from affiliates)
    
    
    
    
    
    
    (1
    )
    
    
    Other, net
    
    
    211
    
    
    
    107
    
    
    
    148Total Adjustments
    
    
    40
    
    
    
    1,569
    
    
    
    37Net cash flows provided by operating activities
    
    
    481
    
    
    
    136
    
    
    
    192Cash flows from investing activities:Sales of fixed maturity securities
    
    
    86
    
    
    
    236
    
    
    
    428Purchases of fixed maturity securities
    
    
    (27
    )
    
    
    (244
    )
    
    
    (440
    )Purchases of equity securities
    
    
    
    
    
    
    2
    
    
    
    (1
    )Change in short term investments
    
    
    (710
    )
    
    
    349
    
    
    
    (381
    )Capital contributions to subsidiaries
    
    
    (156
    )
    
    
    (1,201
    )
    
    
    (304
    )Return of capital from subsidiaries
    
    
    18
    
    
    
    5
    
    
    
    Change in notes receivable from affiliates
    
    
    
    
    
    
    309
    
    
    
    32Other, net
    
    
    7
    
    
    
    (94
    )
    
    
    (19
    )Net cash flows used by investing activities
    
    
    (782
    )
    
    
    (638
    )
    
    
    (685
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    546
    
    
    
    
    
    
    
    Principal payments on debt
    
    
    (250
    )
    
    
    (245
    )
    
    
    (252
    )Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    Issuance of cumulative Series I preferred stock
    
    
    
    
    
    
    
    
    
    
    750Issuance of cumulative Series H preferred stock
    
    
    
    
    
    
    750
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    1
    
    
    
    Other, net
    
    
    5
    
    
    
    (4
    )
    
    
    (5
    )Net cash flows provided by financing activities
    
    
    301
    
    
    
    502
    
    
    
    493Net change in cash
    
    
    
    
    
    
    
    
    
    
    Cash, beginning of year
    
    
    
    
    
    
    
    
    
    
    Cash, end of year
    
    $
    
    
    
    $
    
    
    
    $
    Supplemental disclosures of cash flow information:Cash paid (received):Interest
    
    $
    102
    
    
    $
    123
    
    
    $
    133Federal income taxes
    
    
    (627
    )
    
    
    (369
    )
    
    
    (616
    )Non-cash transactions:Notes receivable for the issuance of common stock
    
    
    
    
    
    
    4
    
    
    
    4
 See accompanying Notes to Condensed Financial Information. 184




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##### Table of Contents



Notes to Condensed Financial Information A. Basis of Presentation The condensed financial information of CNA Financial Corporation (CNAF or the Parent Company)
should be read in conjunction with the Consolidated Financial Statements and Notes thereto included
in Part II, Item 8 of this Form 10-K. CNAFs subsidiaries are accounted for using the equity
method of accounting. Equity in net income of these affiliates is reported as equity in net income
of subsidiaries. Certain amounts applicable to prior years have been reclassified to conform to classifications
followed in 2004. The preparation of Condensed Financial Statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results may differ from those
estimates. B. Investments CNAF classifies its fixed maturity securities (bonds and redeemable preferred stocks) and its
equity securities as available-for-sale, and as such, they are carried at fair value. The
amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion
of discounts to maturity, which are included in net investment income. Changes in fair value are
reported as a component of other comprehensive income. CNAFs investments in fixed maturity securities are composed entirely of corporate bonds. 185




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##### Table of Contents



C. Debt Debt is composed of the following obligations. Debt December 31(In millions)
    
    2004
    
    2003Variable rate debt:Credit facility due April 30, 2004
    
    $
    
    
    
    $
    250Senior notes:6.50%, face amount of $493, due April 15, 2005
    
    
    493
    
    
    
    4926.75%, face amount of $250, due November 15, 2006
    
    
    249
    
    
    
    2496.45%, face amount of $150, due January 15, 2008
    
    
    149
    
    
    
    1496.60%, face amount of $200, due December 15, 2008
    
    
    199
    
    
    
    1995.85%, face amount of $549, due December 15, 2014
    
    
    546
    
    
    
    6.95%, face amount of $150, due January 15, 2018
    
    
    149
    
    
    
    149Debenture, 7.25%, face amount of $243, due November 15, 2023
    
    
    241
    
    
    
    241Urban Development Action Grant, 1.00%, due May 7, 2019
    
    
    3
    
    
    
    3Total
    
    $
    2,029
    
    
    $
    1,732Short term debt
    
    $
    493
    
    
    $
    250Long term debt
    
    
    1,536
    
    
    
    1,482Total
    
    $
    2,029
    
    
    $
    1,732
 On December 15, 2004 CNA Financial completed its sale of $549 million of 5.85% ten-year senior
notes in a public offering. D. Management and Administrative Expenses Certain administrative expenses resulting principally from shareholder expenses, consulting and
fees and dues to states of incorporation of $5 million, $7 million and $3 million were paid
directly by CNAF in 2004, 2003 and 2002. E. Commitments and Contingencies In the normal course of business, CNAF guarantees the indebtedness of certain of its subsidiaries,
which expire through 2025. These guarantees arise in the normal course of business and are given
to induce a lender to enter into an agreement with CNAFs subsidiaries. CNAF would be required to
remit prompt and complete payment when due, should the primary obligor default. The maximum
potential amount of future payments that CNAF could be required to pay under these guarantees are
approximately $19 million at December 31, 2004. CNAF has provided parent company guarantees, which expire in 2015, related to lease obligations of
certain subsidiaries. Certain of those subsidiaries have been sold; however, the lease guarantees
remain in effect. CNAF would be required to remit prompt payment on leases in question if the
primary obligor fails to observe and perform its covenants under the lease agreements. The maximum
potential amount of future payments that CNAF could be required to pay under these guarantees are
approximately $8 million at December 31, 2004. CNA Surety has provided significant surety bond protection for a large national contractor that
undertakes projects for the construction of government and private facilities, a substantial
portion of which have been reinsured by CCC. In order to help this contractor meet its liquidity
needs and complete projects which had been bonded by CNA Surety, commencing in 2003 CNAF has
provided loans to the contractor through a credit facility. In December of 2004, the credit
facility was amended to increase the maximum available loans to $106 million from $86 million. The
amendment also provides that CNAF may in its sole discretion further increase the amounts available
for loans 186




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##### Table of Contents



under the credit facility, up to an aggregate maximum of $126 million. As of December
31, 2004 and 2003, there were $99 million and $80 million of total debt outstanding under the credit facility.
Additional loans in January and February of 2005 brought the total debt outstanding under the credit facility, less accrued interest, to
$104 million as of February 24, 2005. Loews, through a participation agreement with CNAF, provided
funds for and owned a participation of $29 million and $25 million of the loans outstanding as of
December 31, 2004 and 2003 and has agreed to participation of one-third of any
additional loans which may be made above the original $86 million credit facility limit up to the
$126 million maximum available line. In connection with the amendment to increase the maximum available line under the credit facility
in December of 2004, the term of the loan under the credit facility was extended to mature in March
of 2009 and the interest rate was reduced prospectively from 6% over prime rate to 5% per annum,
effective as of December 27, 2004, with an additional 3% interest accrual when borrowings under the
facility are at or below the original $86 million limit. Loans under the credit facility are secured by a pledge of substantially all of the assets of the
contractor and certain of its affiliates. In connection with the credit facility, CNAF has also
guaranteed or provided collateral for letters of credit which are charged against the maximum
available line and, if drawn upon, would be treated as loans under the credit facility. As of
December 31, 2004 and 2003, these guarantees and collateral obligations aggregated $13 million and
$7 million. As of December 31, 2004, the aggregate amount of outstanding principal and accrued interest under
the credit facility was $70 million, net of participation by Loews in the amount of $29 million. The contractor implemented a restructuring plan intended to reduce costs and improve cash flow, and
appointed a chief restructuring officer to manage execution of the plan. In the course of
addressing various expense, operational and strategic issues, however, the contractor has decided
to substantially reduce the scope of its original business and to concentrate on those segments
determined to be potentially profitable. As a consequence, operating cash flow, and in turn the
capacity to service debt, has been reduced below previous levels. Restructuring plans have also
been extended to accommodate these circumstances. In light of these developments, CNA has taken an
impairment charge of $56 million pretax for the fourth quarter of 2004, net
of the participation by Loews, with respect to amounts loaned under the facility. Any draws under
the credit facility beyond $106 million or further changes in the national contractors business
plan or projections may necessitate further impairment charges. As a result of the impairment taken in the fourth quarter of 2004, CNAF plans to recognize income using the effective
interest rate method starting in the first quarter of
2005. Under this method, interest income recognized will be accrued
on the net carrying amount of the loan at the effective interest rate
used to discount the impaired loans estimated future cash flows. The excess of the cash
received over the interest income recognized will reduce the carrying amount of the loan. The change in present value, if any, of the loan that is attributable to changes in the amount or
timing of future cash flows will be recorded similar to the impairment charges previously recorded. CNA Surety has advised that it intends to continue to provide surety bonds on behalf of the
contractor during this extended restructuring period, subject to the contractors initial and
ongoing compliance with CNA Suretys underwriting standards and ongoing management of CNA Suretys
exposure to the contractor. All bonds written for the national contractor are issued by CCC and its
affiliates, other than CNA Surety, and are subject to underlying reinsurance treaties pursuant to which all bonds
on behalf of CNA Surety are 100% reinsured to one of CNA Suretys insurance subsidiaries. This
arrangement underlies the more limited reinsurance coverages discussed below. Through facultative reinsurance contracts with CCC, CNA Suretys exposure on bonds written from
October 1, 2002 through October 31, 2003 has been limited to $20 million per bond, with CCC to
incur 100% of losses above that level. For bonds written subsequent to November 1, 2003, CNA
Suretys exposure is limited to $14.5 million per bond, subject to a per principal retention of $60
million and an aggregate limit of $150 million, under all facultative insurance coverage and two
excess of loss treaties between CNA Surety and CCC. The first excess of loss contract, $40 million
excess of $60 million, provides CNA Surety coverage exclusively for the national contractor, while
the second excess of loss contract, $50 million excess of $100 million, provides CNA Surety with
coverage for the national contractor as well as other CNA Surety risks. For bonds written prior to
September 30, 2002 there is no facultative reinsurance and CCC retains 100% of the losses above the
per principal retention of $60 million. 187




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##### Table of Contents



Renewals of both excess of loss contracts were effective January 1, 2005. CCC and CNA Surety
are presently discussing a possible restructuring of the reinsurance arrangements discussed in the
paragraph above, under which all bonds written for the national contractor would be reinsured by
CCC under an excess of $60 million treaty and other CNA Surety accounts would be covered by a
separate $50 million excess of $100 million treaty. CCC and CNA Surety continue to engage in periodic discussions with insurance regulatory authorities
regarding the level of bonds provided for this principal and will continue to apprise those
authorities regarding their ongoing exposure to this account. Indemnification and subrogation rights, including rights to contract proceeds on construction
projects in the event of default, exist that reduce CNA Suretys and ultimately the Companys
exposure to loss. While CNAF believes that the contractors continuing restructuring efforts may be
successful and provide sufficient cash flow for its operations, the contractors failure to
ultimately achieve its extended restructuring plan or perform its contractual obligations under the
credit facility or under the Companys surety bonds could have a material adverse effect on the
Companys results of operations and/or equity. If such failures occur, the Company estimates the
surety loss, net of indemnification and subrogation recoveries, but before the effects of minority
interest, to be approximately
$200 million pretax. In addition, such failures could cause the remaining unimpaired amount due
under the credit facility to be uncollectible. CNAF has provided guarantees of the indebtedness of certain of its subsidiaries independent
insurance producers, which expire in 2008. CNAF would be required to remit prompt and complete
payment when due, should the primary obligor default. In the event of default on the part of the
primary obligor, CNAF holds an interest in and to any and all shares of common stock of the primary
obligor. The maximum potential amount of future payments that CNAF could be required to pay under
these guarantees is approximately $7 million at December 31, 2004. In the normal course of business, CNAF has provided guarantees to holders of structured settlement
annuities (SSA) provided by certain of its subsidiaries, which expire through 2120. CNAF would be
required to remit SSA payments due to claimants if the primary obligor failed to perform on these
contracts. The maximum potential amount of future payments that CNAF could be required to pay
under these guarantees are approximately $1,624 million at December 31, 2004. F. Capital Transactions with Subsidiaries In 2004, 2003 and 2002, CNAF contributed capital of approximately $156 million, $1,201 million and
$304 million to its subsidiaries. In 2004 and 2003, CNAF subsidiaries returned capital of
approximately $18 million and $5 million. In 2002, there was no return of capital from
subsidiaries. G. Dividends from Subsidiaries and Affiliates In 2004, 2003 and 2002, CNAF received approximately $307 million, $93 million and $118 million in
dividends from subsidiaries. CNAFs ability to pay dividends and other credit obligations is significantly dependent on receipt
of dividends from its subsidiaries. The payment of dividends to CNAF by its insurance subsidiaries
without prior approval of the insurance department of each subsidiarys domiciliary jurisdiction is
limited by formula. Dividends in excess of these amounts are subject to prior approval by the
respective state insurance departments. Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the
domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require
prior approval of the Illinois Department Financial and Professional Regulation  Division of
Insurance (the Department), may be paid only from earned surplus, which is calculated by removing
unrealized gains from unassigned surplus. As of December 31, 2004, CCC is in a negative earned
surplus position. In December of 2004, the Department approved extraordinary dividend capacity of
$125 million to be used to fund CNAFs 2005 debt service requirements. It is anticipated that
CCC will be in a positive earned surplus position at the end of the first quarter of 2005 and be
able to begin 188




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##### Table of Contents



paying ordinary dividends in the second quarter of 2005 as a result of a $500 million
dividend received from its subsidiary, CAC, on February 11, 2005. In addition, by agreement with the New Hampshire Insurance Department, the CIC Group may not pay
dividends to CCC until after January 1, 2006. CNAFs domestic insurance subsidiaries are subject to risk-based capital requirements. Risk-based
capital is a method developed by the NAIC to determine the minimum amount of statutory capital
appropriate for an insurance company to support its overall business operations in consideration of
its size and risk profile. The formula for determining the amount of risk-based capital specifies
various factors, weighted based on the perceived degree of risk, which are applied to certain
financial balances and financial activity. The adequacy of a companys actual capital is evaluated
by a comparison to the risk-based capital results, as determined by the formula. Companies below
minimum risk-based capital requirements are classified within certain levels, each of which
requires specified corrective action. As of December 31, 2004 and 2003, all of CNAFs domestic
insurance subsidiaries exceeded the minimum risk-based capital requirements. H. Preferred Stock The capital plan established in November of 2003 consisted of the sale of $750 million of a new
series of CNA convertible preferred stock to Loews. The preferred stock converted into 32,327,015
shares of CNAF common stock on April 20, 2004. The number of shares was determined utilizing a
conversion price per share of common stock that was based on average market prices of CNAF common
stock from November 17, 2003 through November 21, 2003. The terms of the Series I Issue were
approved by a special committee of independent members of CNAFs Board of Directors. During 2002, CNAF sold $750 million of a then new issue of preferred stock, designated Series H
Cumulative Preferred Issue (Series H Issue), to Loews. The terms of the Series H Issue were
approved by a special committee
of independent members of CNAFs Board of Directors. The proceeds from the Series H Issue were
applied by CNAF to increase the statutory surplus of CNAFs principal insurance subsidiary, CCC. The Series H Issue accrues cumulative dividends at an initial rate of 8% per year, compounded
annually. It will be adjusted quarterly to a rate equal to 400 basis points above the ten-year
U.S. Treasury rate beginning with the quarterly dividend after the first triggering event to occur
of either (i) an increase by two intermediate rating levels of the financial strength rating of CCC
from its rating at the time of issuance by any of A.M. Best Company, Standard & Poors or Moodys
Investor Services or (ii) one year following an increase by one intermediate ratings level of the
financial strength rating of CCC by any one of those rating agencies. Accrued but unpaid
cumulative dividends cannot be paid on the Series H Issue unless and until one of the two
triggering events described above has occurred. Beginning with the quarter following an increase
of one intermediate rating level in CCCs financial strength rating, however, current (but not
accrued cumulative) quarterly dividends can be paid. As of December 31, 2004, the Company has $127
million of undeclared (and therefore unrecorded) but accumulated dividends. The Series H Issue is senior to CNAFs common stock as to the payment of dividends and amounts
payable upon any liquidation, dissolution or winding up. No dividends may be declared on CNAFs
common stock until all cumulative dividends on the Series H Issue have been paid. CNAF may not
issue any equity securities ranking senior to or on par with the Series H Issue without the consent
of a majority of its stockholders. The Series H Issue is non-voting and is not convertible into
any other securities of CNAF. It may be redeemed only upon the mutual agreement of CNAF and a
majority of the stockholders of the preferred stock. 189




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##### Table of Contents



SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION Gross Insurance Reserves
    
    
    
    
    
    
    
    
    
    Insurance
    
    Amortiz-Claims and
    
    ationDeferred
    
    Claim
    
    Future
    
    
    
    
    
    Policy-
    
    
    
    
    
    Net
    
    Policy-
    
    of Deferred
    
    Other
    
    NetAcquisition
    
    And Claim
    
    Policy
    
    Unearned
    
    holders
    
    Net Earned
    
    Investment
    
    holders
    
    Acquisition
    
    Operating
    
    Written Pre-Costs
    
    Expense
    
    Benefits
    
    Premium
    
    Funds
    
    Premiums
    
    Income (a)
    
    Benefits
    
    Costs
    
    Expenses
    
    miums (b)(In millions)December 31, 2004Standard Lines
    
    $
    444
    
    
    $
    14,302
    
    
    $
    
    
    
    $
    1,978
    
    
    $
    43
    
    
    $
    4,917
    
    
    $
    495
    
    
    $
    3,487
    
    
    $
    1,109
    
    
    $
    687
    
    
    $
    4,582Specialty Lines
    
    
    285
    
    
    
    4,860
    
    
    
    
    
    
    
    1,546
    
    
    
    
    
    
    
    2,277
    
    
    
    246
    
    
    
    1,446
    
    
    
    506
    
    
    
    201
    
    
    
    2,391Life and Group Non-Core
    
    
    537
    
    
    
    3,680
    
    
    
    5,883
    
    
    
    164
    
    
    
    1,682
    
    
    
    921
    
    
    
    692
    
    
    
    1,369
    
    
    
    36
    
    
    
    367
    
    
    
    633Corporate and Other Non-Core
    
    
    2
    
    
    
    8,678
    
    
    
    
    
    
    
    834
    
    
    
    
    
    
    
    128
    
    
    
    241
    
    
    
    165
    
    
    
    29
    
    
    
    151
    
    
    
    5Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (99
    )
    
    
    (17
    )Consolidated Operations
    
    $
    1,268
    
    
    $
    31,520
    
    
    $
    5,883
    
    
    $
    4,522
    
    
    $
    1,725
    
    
    $
    8,209
    
    
    $
    1,674
    
    
    $
    6,446
    
    
    $
    1,680
    
    
    $
    1,307
    
    
    $
    7,594December 31, 2003Standard Lines
    
    $
    499
    
    
    $
    14,282
    
    
    $
    
    
    
    $
    2,267
    
    
    $
    79
    
    
    $
    4,530
    
    
    $
    407
    
    
    $
    4,542
    
    
    $
    1,195
    
    
    $
    938
    
    
    $
    4,561Specialty Lines
    
    
    257
    
    
    
    4,200
    
    
    
    
    
    
    
    1,480
    
    
    
    3
    
    
    
    1,840
    
    
    
    201
    
    
    
    1,651
    
    
    
    408
    
    
    
    201
    
    
    
    2,038Life and Group Non-Core
    
    
    1,745
    
    
    
    3,576
    
    
    
    8,161
    
    
    
    153
    
    
    
    522
    
    
    
    2,376
    
    
    
    821
    
    
    
    2,394
    
    
    
    224
    
    
    
    596
    
    
    
    538Corporate and Other Non-Core
    
    
    32
    
    
    
    9,672
    
    
    
    
    
    
    
    1,100
    
    
    
    (3
    )
    
    
    582
    
    
    
    218
    
    
    
    1,815
    
    
    
    138
    
    
    
    199
    
    
    
    496Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114
    )
    
    
    
    
    
    
    (115
    )
    
    
    
    
    
    
    (118
    )
    
    
    (16
    )Consolidated Operations
    
    $
    2,533
    
    
    $
    31,730
    
    
    $
    8,161
    
    
    $
    5,000
    
    
    $
    601
    
    
    $
    9,214
    
    
    $
    1,647
    
    
    $
    10,287
    
    
    $
    1,965
    
    
    $
    1,816
    
    
    $
    7,617December 31, 2002Standard Lines
    
    $
    519
    
    
    $
    12,779
    
    
    $
    
    
    
    $
    2,163
    
    
    $
    47
    
    
    $
    4,678
    
    
    $
    475
    
    
    $
    3,491
    
    
    $
    1,125
    
    
    $
    654
    
    
    $
    4,755Specialty Lines
    
    
    216
    
    
    
    3,628
    
    
    
    
    
    
    
    1,261
    
    
    
    3
    
    
    
    1,451
    
    
    
    172
    
    
    
    1,069
    
    
    
    349
    
    
    
    170
    
    
    
    1,574Life and Group Non-Core
    
    
    1,764
    
    
    
    3,457
    
    
    
    7,409
    
    
    
    156
    
    
    
    533
    
    
    
    3,408
    
    
    
    821
    
    
    
    3,220
    
    
    
    162
    
    
    
    732
    
    
    
    1,682Corporate and Other Non-Core
    
    
    52
    
    
    
    7,506
    
    
    
    
    
    
    
    1,253
    
    
    
    (3
    )
    
    
    714
    
    
    
    262
    
    
    
    681
    
    
    
    155
    
    
    
    321
    
    
    
    680Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (38
    )
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    (143
    )
    
    
    (38
    )Consolidated Operations
    
    $
    2,551
    
    
    $
    27,370
    
    
    $
    7,409
    
    
    $
    4,820
    
    
    $
    580
    
    
    $
    10,213
    
    
    $
    1,730
    
    
    $
    8,420
    
    
    $
    1,791
    
    
    $
    1,734
    
    
    $
    8,653
 (a) Investment income is allocated based on each segments net carried insurance reserves as
adjusted. (b) Net written premiums relate to business in property and casualty companies only. 190




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##### Table of Contents



SCHEDULE IV. REINSURANCE Incorporated herein by reference from Note H of the Consolidated Financial Statements included
under Item 8. 
 SCHEDULE V. VALUATION AND QUALIFYING ACCOUNTS Balance at
    
    Charged to
    
    Charged toBeginning
    
    Costs and
    
    Other
    
    
    
    
    
    Balance atof Period
    
    Expenses
    
    Accounts (a)
    
    Deductions
    
    End of Period(In millions)Year ended December 31, 2004Deducted from assets:Allowance for doubtful accounts:Insurance and reinsurance receivables
    
    $
    948
    
    
    $
    87
    
    
    $
    14
    
    
    $
    1
    
    
    $
    1,048Year ended December 31, 2003Deducted from assets:Allowance for doubtful accounts:Insurance and reinsurance receivables
    
    $
    352
    
    
    $
    602
    
    
    $
    3
    
    
    $
    9
    
    
    $
    948
 (a) Amount includes effects of foreign currency translation. 
 SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS Consolidated Property and Casualty OperationsAs of and for the years ended December 31
    
    2004
    
    2003
    
    2002(In millions)Deferred acquisition costs
    
    $
    1,267
    
    
    $
    1,321
    
    
    $
    1,257Reserves for unpaid claim and claim adjustment expenses
    
    
    31,201
    
    
    
    31,282
    
    
    
    25,648Discount deducted from claim and claim adjustment expense reserves
above (based on interest rates ranging from 3.5% to 7.5%)
    
    
    1,827
    
    
    
    2,280
    
    
    
    2,440Unearned premiums
    
    
    4,522
    
    
    
    5,000
    
    
    
    4,813Net written premiums
    
    
    7,594
    
    
    
    7,617
    
    
    
    8,653Net earned premiums
    
    
    7,925
    
    
    
    7,469
    
    
    
    8,438Net investment income
    
    
    1,260
    
    
    
    1,532
    
    
    
    1,422Incurred claim and claim adjustment expenses related to current year
    
    
    5,118
    
    
    
    4,747
    
    
    
    6,722Incurred claim and claim adjustment expenses related to prior years
    
    
    235
    
    
    
    2,431
    
    
    
    52Amortization of deferred acquisition costs
    
    
    1,641
    
    
    
    1,827
    
    
    
    1,660Paid claim and claim adjustment expenses
    
    
    5,359
    
    
    
    5,075
    
    
    
    8,218
 191




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. CNA Financial CorporationDated: February 25, 2005
    
    By
    
    /s/ Stephen W. LilienthalStephen W. LilienthalChief Executive Officer(Principal Executive Officer)By
    
    /s/ D. Craig MenseD. Craig MenseExecutive Vice President andChief Financial Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the date
indicated. Dated: February 25, 2005
    
    By
    
    /s/ Brenda J. Gaines(Brenda J. Gaines, Director)Dated: February 25, 2005
    
    By
    
    /s/ Stephen W. Lilienthal(Stephen W. Lilienthal, Chief ExecutiveOfficer and Director)Dated: February 25, 2005
    
    By
    
    /s/ Paul J. Liska(Paul J. Liska, Director)Dated: February 25, 2005
    
    By
    
    /s/ Don M. Randel(Don M. Randel, Director)
 193




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##### Table of Contents



Dated: February 25, 2005
    
    By
    
    /s/ Joseph Rosenberg(Joseph Rosenberg, Director)Dated: February 25, 2005
    
    By
    
    /s/ James S. Tisch(James S. Tisch, Director)Dated: February 25, 2005
    
    By
    
    /s/ Preston R. Tisch(Preston R. Tisch, Director)Dated: February 25, 2005
    
    By
    
    /s/ Marvin Zonis(Marvin Zonis, Director)
 195